High yielding Character set for turnaround

The pain from the failure of Toy R Us and discounting by rivals was plain to see in the half-year results. Sales were down 18 per cent to £50.5m, and underlying pre-tax profit fell 37 per cent to £4.5m. An ongoing risk for the group is that a significant proportion of costs are in US dollars. In the first half this meant a £3.9m charge relating to currency movements, compared with £570,000 the previous year.

But there are now reasons for optimism. Indeed, higher-margin UK sales hit record levels in January and February, which helped to improve the gross profit margin from 32.2 per cent in 2017 to 35.3 per cent. UK sales make up about three-quarters of group revenue.

The brands that Character works with are well known. In-house ranges, where the group does everything from design to distribution, include Peppa Pig, Stretch, Teletubbies and Scooby Doo. Exclusive, third-party lines include Little Live Pets and Mashems. Meanwhile, the group believes there are strong prospects for a number of new products scheduled to launch during the second half of the year including a new range of Pokémon products.

The group looks well positioned to benefit from the recent pick-up in demand due to the skill with which it appears to have navigated the first-half downturn. Indeed, despite the torrid trading, the group started 2018 with virtually no excess stock. Meanwhile, a rise in inventory at the end of February to £8.0m, compared with £6.2m a year earlier, was attributed to "significant increases in stocks in transit to service the higher UK demand". Indeed, slow moving inventory was described as "minimal" at the time of the half-year results.

The company is in a strong financial position, too, with a healthy net cash position. This should support the attractive dividend payout that was 1.54 times covered by earnings at the half-year stage. And while the difficult first half will weigh on full-year numbers, recent trading news has sparked earning forecast upgrades. Broker Panmure Gordon recently pencilled in EPS upgrades of 5 per cent for the current and next two financial years.