Stockwatch: A high-yielder to double?

Does Bonmarché portend value or is its share price plunge, another high street casualty? This value clothing retailer, aimed mainly at women over 55, has a 34-year history and ought to represent sound marketing - but its non-index stock has fallen from 316p to 120p since a December 2015 double whammy involving a profit warning and planned departure of its chief executive.

Latest prelims for the year to 26 March appear to have ended the rout and the price has risen to 130p. Assuming forecasts by two brokers behind the consensus, the forward price/earnings (PE) multiple is only about six times, compared with earnings recovering at double-digit rates to enable a 5.5% dividend yield nearly thrice covered.

A PE of six essentially says the market has lost confidence in Bonmarché's retailing, so buyers need to be reasonably satisfied management can do better.

Meanwhile, other aspects of group finances are encouraging; for example the cash flow profile (see table below) is strong: net cash from operations exceeds operating profit and there is no bank debt to compromise £13.0 million cash-at-bank. So, despite setbacks in the commercial story, the financial risk/reward profile has attractions at 130p.

If a new CEO can build on the "five pillars for growth" strategy to gain better traction, then the stock can potentially double. Meanwhile, the dividend yield looks fair compensation and secure, given it requires £3.5 million to £4 million annually, so is supported by the balance sheet. A consumer recession looks the chief risk, if 'Brexit' becomes reality and you believe "project fear".

Needs to stop being a weather victim

It's a longstanding adage that weak managers continually blame the weather to justify setbacks. Bonmarché may be the most prominent example, but clothing retailers are exposed to unseasonal weather given clothes are marketed according to seasonal expectations.

Yet surprise weather may be a reality of climate change and retailers need nimbler stock management skills. Bonmarché's latest prelims reflect feeling like a victim of events: "Last summer's wet weather affected sales of dresses, T-shirts and swimwear, then a mild autumn/early winter compromised coats and sweaters."

It also shows the end-November "Black Friday" proving more a risk than opportunity, with heavy discounting slashing margins and effectively borrowing revenues from the future. Management also complains the cold, wet weather this springtime affected sales and discounting to shift unsold stock hurt margins.

Wider marketing issues are at least recognised: "Whilst we saw good progress in our core and wardrobe favourite categories, we had less success with more seasonal departments, where we repeated best sellers for too long and did not introduce enough 'newness'. Blouses, dresses and skirts are key examples where there was insufficient progress."

More positively: "Successes with a long, tailored jacket and the growth of our printed trouser range have given us the confidence to increase significantly the pace of modernisation of our range, which is a priority for the current financial year and beyond."

Online sales disappoint; costs are another issue

Revenue figures are no disaster within the latest results, up 5.3% to £188.0 million - albeit with stores up only 0.7% like-for-like and online up 3.6%. Online sales represent 7.3% of total sales in the last financial year, which management describes as "disappointing".

Possibly older women are less internet-oriented than the teenagers fuelling growth at fashion retailer Boohoo, and still look to mail order catalogues, but sluggish online growth is a concern.

More perturbing is a 16.3% rise in administrative costs to £26.6 million, with distribution costs also up by 12.1% to £8.7 million, meaning a 23.2% drop in operating profit to £9.7 million after gross profit showed a 4.0% rise to £43.9 million.

Capital expenditure fell 10% to £5.7 million - so these cost rises reflect headwinds such as the living wage and business rates, which it may be difficult to counter without a streamlining effort. If that follows from a new CEO's review, then exceptional costs would likely arise.

New CEO may break with recent issues

This accumulation of factors behind December's profit warning and a second one last April, indicating 2015/16 profit at the lower end of guidance, may help explain why the current CEO, Beth Butterwick, is to move on. A replacement, Helen Connolly, currently senior buying director for George at ASDA, was announced at end-March.

She's due to take up her position "later in the year". Bonmarché's chairman extols her "strong track record in delivering exceptional results" - so perhaps she can overcome marketing issues that have compromised the group lately.

Yet the current CEO is pretty capable; the key question is whether Bonmarché has a sufficiently attractive formula both to convince shoppers and mitigate the cost challenges of high street sales.

British weather isn't going to turn conveniently more predictable for a new boss. So the market is right not to bid up Bonmarché stock significantly on hopes for what another CEO may achieve.

An "unusually difficult year" now in the past?

It's simply possible, as stated in the latest results, that 2015/16 was an "unusually difficult year" as adverse factors conflated. The stockmarket may have over-reacted, as markets are prone to do. Think too hard and you miss the fact that 130p a share represents potentially attractive pricing.

Management only needs a bit more care and luck to favour upside from a level that exacts a 5%+ yield. Poor weather continues to get the blame for tough trading, but "provided trading conditions normalise" the full-year expectation is unchanged.

Analysts have identical £12.5 million pre-tax forecasts, so we can assume this reflects guidance i.e. management's budget. Barring a Brexit vote introducing fresh uncertainty, the odds therefore favour medium-term upside.

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This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.