Stockwatch: A good tuck-away AIM stock

The interim resultsfrom Bonmarche, the AIM-listed clothing retailer which caters mainly for over-50s women, affirm a stock trading on about 14 times forecast earnings with a dividend yield of about 2.7%. It floated at 200p just over a year ago, hit 300p in early 2014 then drifted like many stocks as the QE-driven exuberance wore off; a tight market can also accentuate any trend.

I drew attention last June at about 270p and the price is 285p after the results showed underlying pre-tax profit up 15% to £6.4 million on like-for-like sales growth up 7.8% to £96.4 million. Normalised earnings per share advanced 13.8% to 9.9p. Bear in mind, percentage changes can seem more dramatic amid the dynamics of a smaller company. An interim dividend of 2.3p is due.

Capable boss spurs adept marketing model

The investment ratios look fair; the investment rationale largely centres on a turnaround morphing into a steady reliable growth business. Beth Butterwick has recognised Bonmarche's potential by way of focus on older women and demographics imply plenty of scope: it's estimated that over two-thirds of retail growth in the next ten years will come from the over-55s. Not that it guarantees success, but Bonmarche is well-positioned and without a lot of competition.

The most significant driver of better sales has been improvements to the ranges, especially more contemporary styles. A "first price, right price" approach is taken where the lowest-priced items in any product category are as competitive as can be. The highest-priced items in any category are then stretched (to compensate) e.g. from £26.24 in 2013 to £28.96 this last year - an example being the Ann Harvey brand of occasion-wear and smart day-wear, priced 25% above existing exit prices. The overall approach has meant the average selling price has increased from £14.87 to £15.14.

Good progress despite unseasonably warm weather

Various clothing retailers have been caught out lately, positioning autumn ranges fewer people felt compelled to buy during September's Indian summer which persisted into October. Trading conditions became expressly "more difficult" and affected the start of Bonmarche's second half from 28 September. The onset of winter should now help sales of heavier items in the 2014/15 winter selection which includes the exclusive David Emanuel "from size 10" range.

Management says next year it will offer “a greater proportion of transitional garments” between the main seasonal ranges. Such admissions hint the already respectable interim results would have been better with more normal autumnal weather.

Interestingly, the number of suppliers has been reduced from 119 to 92 in order to create more partnership to distinguish products and enable more flexibility - similar logic to Premier Foods, although there have been no revelations about "investment payments" required. It looks to be a general pattern in retailing as the supply chain is streamlined (partly as managers see Aldi/Lidl benefiting from a more economic structure).

A trial of Bonmarche men's clothing has been launched, said due to requests from existing female customers; and while it might initially appear an odd brand to interest men, surveys have shown that men (especially in relationships) buy only 30% of their clothes with the rest made up from gifts from family and friends. Women are more likely to spend time shopping and picking out clothes for their other halves.

Online/multi-channel sales could offer more scope

While online sales have grown 50.6% like-for-like, this element was only 7.9% of first-half sales versus 96.4% like-for-like sales and 4.9% new stores. Not exactly ASOS yet then. The irony - if not opportunity cost - is larger ladies preferring to clothes-shop online i.e. with more privacy, as shown by visitor numbers to the Bonmarche website up from 4.0 million to 6.3 million.

The company appears to have been somewhat out-of-step as access by mobile devices grew sharply (I recall Argos prioritising "multi-channel" astutely, to benefit from smartphone/tablet ordering) hence a new "responsive" website is being discussed with Venda, a specialist in cloud-based e-commerce. "These negotiations have been more protracted than we expected... however we expect work to begin soon."

Installing a new electronic point of sale (EPOS) system is being undertaken - carefully, given the risk of snags. An initial trial in 5 stores has led to 18 seeing phase 2, with full roll-out due after Christmas - aimed completed in the first half of 2015. Feedback is said to be very positive, it being intended to introduce more functionality to enhance the multi-channel offer.

Re-fits and new store openings proceed to plan

Of a total 275 outlets, 39 have recently been re-fitted with a further 40 planned for full re-fit. The group is experimenting with non-conventional locations - 13 to date - such as garden centres, other department stores and out-of-town "mill" centres. The expectation is for 20-25 new outlets in the current financial year with the emphasis on novel locations.

The balance sheet looks in sound shape to support this with £13.5 million cash - up from £11.3 million like-for-like - despite operational cash flow down to £11.4 million from £13.5 million. Lower interest and tax charges made for similar net cash generation of about £10 million. Debt is not specified just a total £0.9 million, mainly non-current financial liabilities.

A good tuck-away, AIM stock

As with Young & Co Brewery I would reiterate bearing this kind of sound AIM stock in mind if you seek to reduce inheritance tax liability on your estate. Bonmarche is a proven business since 1982; it only ended up in administration because second generation Sikh founders sold it to Peacock Group which later got into difficulties as a result of big debts in a buyout.

While the financial parameters don't scream "value" the operation looks overall a capable one - attuned to a resilient demographic, and should continue to benefit from incomes under pressure. It's no explosive growth stock but these latest interims suggest a long-term winner taking shape.