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Joules still a sector winner

The clothing chain could still outperform some of its beleagured peers
December 27, 2018

A slew of weather-related profit warnings have recently emanated from the UK high street and many have come from clothing retailers. However, seaside brand Joules (JOUL) appears to offer a bright spot, not that this has prevented a significant de-rating of the shares. A recent trading update revealed a near-18 per cent sales surge over the 26-week period ended 25 November 2018 – a performance that reflects the flexibility of Joules’ model, with sales made online, from its own stores and through concessions. It also has a fast-growing international business. The performance is in sharp contrast to many other retailers, which have reported sluggish progress in the run-up to Christmas. Instead, recent trading at Joules suggests the current sell-off of the stock may ignore the strong fundamentals.

IC TIP: Buy at 223p
Tip style
Growth
Risk rating
High
Timescale
Medium Term
Bull points
  • Strong sales growth
  • Good return on capital employed
  • Net cash
  • Good pre-close update
Bear points
  • Competitive retail environment
  • Lease commitments

Despite continued uncertainty around Brexit and an increasingly punitive cost environment, top-line momentum has continued for Joules, with half-year underlying revenue growth of 14 per cent outperforming broker Berenberg’s 13 per cent forecast. The e-commerce and international businesses have spurred performance, with nearly half of total retail sales now made online. International revenue has grown to account for 16 per cent of sales, up from 13.1 per cent reported at the time of full-year results in July. As a result, management now expects half-year pre-tax profits (half-year results are due on 23 January 2019) to beat expectations.

But retail sales aren’t the only thing fueling growth. Wholesale revenues continue to grow strongly, too, even if the transition of some wholesale accounts to a retail concession model impacted this growth in the first half. Still, wholesale revenues grew by 26 per cent on a comparative basis, with over half of those sales coming from overseas. Licensing is another burgeoning division for Joules, with analysts at Berenberg suspecting that this segment grew by as much as 230 per cent in the first half. And while those numbers could have been disproportionately inflated by its partnership with sofa specialist DFS (DFS), Berenberg reckons licensing revenue could double in 2019 given the success of current deals. There are few costs associated with licensing deals, so while revenues are still small (about 0.7 per cent of Berenberg's total forecast 2019 sales), much of this is profit, and success here could prompt further earnings upgrades.

The prospect of further upgrades would help supports the investment case. The protracted sell-off across European retail stocks of late means the shares certainly look cheap if trading continues to hold up. The group boasts a price/earnings growth (PEG) ratio of just 1.3, while the price/sales ratio stands at just 0.9 times 2019 forecast sales. That seems harsh for a business that was able to produce a return on average capital employed last year of almost 30 per cent. And although the group's operating margins do not stand out at 6.2 per cent, profitability is improving.

Cash generation may be one bugbear for investors, though. Expanding the store estate and growing through new channels means fit-out costs and stock build are considerable drains on cash. The company also last year completed investment in a costly new computer system and paid £4.5m for an additional 30,000 square foot head office site in Market Harborough. Investment of £16m to £18m is planned over the next two to three years in the building. Still, the group is currently debt free although this does not account for lease liabilities which will need to be reported on the balance sheet from next year. The group’s dividend is covered more than five times by earnings, although the level of the payout is not enticing.

JOULES (JOUL)   
ORD PRICE:223pMARKET VALUE:£196m
TOUCH:215-224p12-MONTH HIGH:393pLOW: 205p
FORWARD DIVIDEND YIELD:1.5%FORWARD PE RATIO:14
NET ASSET VALUE:44p*NET DEBT:£nil
Year to 27 MayTurnover (£m)Pre-tax profit (£m)**Earnings per share (p)**Dividend per share (p)
20161318.0-2.00.0
201715710.07.31.8
201818613.09.92.0
2019**20915.013.72.8
2020**23318.016.13.3
% change+11+20+18+18
Normal market size:1,000   
Beta:0.61   
*Includes intangible assets of £12.6m, or 14p a share
**Berenberg forecasts, adj PTP and adj EPS