Step back from Footasylum

The shares fell almost 50 per cent on the release of full-year numbers last month, which contained disappointing guidance around gross margins and cash profits for the current financial year. In the year to the end of February 2018 gross margin fell from 45.9 per cent to 45 per cent and the company expects the trend to continue, partly due to growth in the lower-margin wholesale and online operations. Shifting old stock is also a problem, so further discounting looks likely.

The board has also changed its mind when it comes to new store openings. At the time of the float last November, energy was largely being directed into developing new sites. While this is still on the agenda, the group has decided to focus more on “upsizes”. That means refurbishing and possibly enlarging existing stores rather than relocating them. The company’s projections are that this will lead to a higher rent bill this year and thus reduce cash profits by around £1.4m. All in all, this means Footasylum announced its first profit warning only eight months after going public, prompting significant pre-tax profit downgrades, and with some brokers marking numbers down by as much as 25 per cent.

Suffice to say, broker Peel Hunt believes this new strategy – not to mention new financial guidance – isn’t what investors “signed up for” at the time of the IPO. The brokerage is also wary of longer-term problems, too. As the popularity of online shopping grows, manufacturers are preferring to go straight to consumers, in turn limiting how many retail partners they work with. This could curtail retailers’ access to exclusive and desirable product ranges – a key competitive advantage these companies have in the modern shopping age. Many of these relationships have been whittled down across the industry already, but Peel Hunt expects further consolidation to just a few key retail partners.

Some groups are in a more defensible position. For example JD Sports has not only a great track record, but also a wide reach across global markets, both online and with physical stores. Footasylum, however, cannot boast the same footprint or brand caché. Any loss of exclusive deals will increase the pressure from what is already significant competition for shoppers – not only from JD Sports, but from rivals such as Sports Direct (SPD) and online pure-play Asos (ASC).