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Sector Focus: Ye Olde Curiosity Shoppe

In 2017 is there life left in hobbyist retailers?
April 28, 2017

Analysis of the retail sector is becoming increasingly focused on the new. Such is life. How easily can we shop from the comfort of our own sofa? How can we interact with knowledgeable salespeople without having to speak to anyone? How can we find the lowest price without dedicating a Saturday to trolling around the shops?

All of these problems have been solved by the advent of online shopping and the digitalisation of consumerism. Yet poke around the retail constituents of the London Stock Exchange and there are companies that not only evoke nostalgia, but their relatively shy forays into digital retailing mean they can embody it too. So how much life is left in companies like this? And should investors be wary of giving in to their emotions on this front? And if they're struggling, is that down to an outmoded business offering, with an appeal limited to generations weened on Meccano and crystal radio sets, or is it simply a case of mismanagement?

 

Losing steam through an activist view

Two prime examples spring to mind here: model maker Hornby (HRN) and stamp specialist Stanley Gibbons (SGI). But they are joined by a cohort of other old-world retailers, some of which are in danger of falling prey to the history books.

April has been a busy month for Hornby. First, a bullish announcement regarding the completion of the first phase of its turnaround plan - in the offing since last June - managed to galvanise the share price in a single day's trading. The company, which makes miniature trains for hobby enthusiasts, along with Thomas the Tank Engine merchandise and Scalextric and Corgi cars, said its UK and European businesses had significantly reduced costs and cut back on product ranges.

This follows on from last year's announcement (curiously reminiscent of the Beeching cuts) that it planned to axe more than half of its product lines after finding just 50 per cent of the range accounted for 90 per cent of profits. What's more, the company's debt pile - which threatened to engulf it a year ago - has been transformed into net cash to the tune of £1m. Newly installed chief executive Steve Cooke sealed the update by admitting that although the past 12 months had been a "challenging time", the group now had "a strong base from which [to] build".

But the good news was shortlived. Less than a week later it emerged all was not well among Hornby's shareholders and the board. Alexander Anton - who some might know as a non-executive director of carpet retailer Victoria (VCP) - is associated with New Pistoia Income, a fund that owns about a fifth of Hornby, making it the second-largest investor after Phoenix Asset Management. Both Mr Anton and New Pistoia are calling for a general meeting to discuss the future of Hornby chairman Roger Canham. It seems some shareholders have grown dissatisfied with the progress of the recovery plan since Mr Canham joined the effort in 2012.

Quite how Phoenix feels is unclear. Mr Anton has apparently expressed further concern that, because Mr Canham serves as chairman here as well, the asset manager exerts too much control over the group and doesn't have the rest of the shareholders' best interests at heart. Ultimately, Mr Anton wants Mr Canham out, and to get himself appointed to the board instead, although whether he wants the role of chairman or not is unclear. The directors of Hornby "unanimously" consider the proposals are not in the group's or shareholders' best interests. Suffice to say, the group's share price lost most of its previous momentum in the wake of this infighting.

 

A stamp of authority required

Anyone familiar with the recent travails of Stanley Gibbons would be inclined to the view that philately will, indeed, get you nowhere. The group, which deals primarily in stamps, coins and other collectibles, has also been through the wringer over the past couple of years. An announcement in February 2016 admitted that it would be forced to raise equity worth £10m in order to keep business going in the near term. It had debt of £22.6m at the time, and confessed that sales of rare collectibles to high-net-worth clients were lower than expected. Trading was particularly difficult in the interiors division, while the integration of recent acquisitions didn't achieve the level of cost savings required. This pain was further exacerbated by investments made in the online platform. Finally, the group confessed that losses would escalate to between £1m and £2m for the year ending 31 March 2016.

A year on, the group has a new chairman in the form of ex-resources man and avid stamp collector Harry Wilson. It's sold several London leases, netting itself £2.5m, while cost reductions of £10m have also been identified, so net debt now stands at £16.5m - that's progress, of sorts.

Could rarities come to the rescue? The group has just announced the sale of a rare Indian stamp to a private collector in Australia for £500,000. The recent sale follows that of another Indian philatelic rarity, the famous 'Four Annas', which sold in March this year for almost £110,000.

The upshot here is that things are looking slightly brighter for Stanley Gibbons. It seems the board has come together, identified what needed to be done and taken hard action, including migrating as much of its business online as possible. But that hasn't stopped the shares halving in value over the past 12 months (they lost more than 85 per cent of their value during 2016), and now rest at an all-time low.

 

All doom and gloom?

You may feel this piece has an unforgivingly negative tone at this point. But it's important to highlight these companies' struggles as millennial tastes overtake the majority of active shoppers these days. After all, nostalgia ain't what it used to be. However, for those still harbouring hope, there might be a shining jewel in the form of miniature maker and fantasy gift seller Games Workshop (GAW). Although our current view on the stock is certainly positive, it's worth remembering that the company also has a chequered past.

So what makes its future look so much brighter than other niche operators? Nearly three-quarters of Games Workshop's sales are generated overseas, which makes it a significant beneficiary of the recent weakness in the pound. But the timing of the currency-related boost also coincided with a tangible uptick in trading. The latest half-year results from the retailer prompted broker Peel Hunt to upgrade forecasts for the full year by 17 per cent, which followed a whopping 30 per cent mark-up on the back of a December trading update. It's fair to say currency played a significant part in boosting first-half sales by 28 per cent to £70.9m, but underlying growth was still 13 per cent even without this tailwind. What's more, progress has been made across all three of the group's main divisions and across all territories. This has largely been fuelled by a swath of new and exclusive product launches, attractive pricing in the US and better engagement with its customers via social media - a latter-day marketing tool, if ever there was one.

 

IC VIEW

What makes these stocks a little more problematic for retail investors is their thinly traded volumes. It makes the share prices particularly sensitive to news - good or bad - so investors must accept that the stocks are prone to volatility. Some, like Games Workshop, appear to be in firm recovery mode, with or without global exchange rates playing to their favour. A point worth making is that it isn't just the hobbyists that are failing to adapt to modern shopping trends and tastes. Consider the likes of N Brown (BWNG) and Bonmarché (BON) - both of which came under pressure in 2016 amid criticism of their 'over 50s' tag line, poor trading patterns and rising costs.

 

Favourites

It's probably clear already, but we have few companies topping our bull list in this category. Our recent buy call (844p, 9 Feb 2017) on Games Workshop has proved to be good judgment, with the shares already 17 per cent to the good. That means the share price has doubled in the past 12 months and we see momentum continuing, particularly if sterling weakness against the greenback continues.

Outsiders

We have a host of retailers on our bear list this week, many of which have been discussed in more detail already. Although some recovery plans are more firmly in place than others, trading remains lumpy and demand unpredictable. In addition, analysts point out that aside from the particular challenges faced by niche retailers, they're also prone to wider industry challenges, including input cost inflation and a squeeze on discretionary spending. Higher staff costs and business rates are also bearing down on margins, while rising rents spell bad news for companies trapped in onerous lease commitments. This naturally makes the more digitalised and connected companies more agile, and more able to sidestep rising costs.