Fast-growing Joules sets market alight

The rise of online retailers like Amazon has sounded a death knell for the 'bricks and mortar' brigade on UK high streets. And with inflation growing faster than wages, there's plenty to fear for those that aren't offering something different and interesting.

However, there are still pockets of value for investors in the high-street retailing sector.  JD Sports is doing a stellar job in delivering shareholder value by aiming products at consumers' needs for perceived 'luxury' items and building excellent relationships with major brands like Nike and Adidas.

Joules, a clothing and homeware retailer with over 100 stores in the UK and Ireland, is a similar case in point. And, ahead of maiden full-year results as a listed entity next month, the firm is growing much quicker than analysts expected.

Group revenue for the 52 weeks to 28 May grew by almost a fifth to £157 million, as a strong first half and Christmas period continued through to year-end. Pre-tax profit will be "comfortably ahead of previous expectations", we're told, with broker Peel Hunt forecasting £9.9 million. Last year it was £7.5 million.

Retail revenue increased by a similar amount (19.4%), driven by the website and continued growth in store numbers. Joules' wholesale division grew by 20.3%, led by a strong Spring/Summer order book both here and overseas.

Gross margins are also expected to improve, by as much as 100 basis points, according to broker Liberum. And, on the theme of doing things differently, analyst Wayne Brown reckons Joules' rural and seaside store locations mean it benefits from a growing popularity in 'staycations' due to the weak pound.

Having spoken of the impressive set of results due on 26 July, Peel Hunt analyst John Stevenson says "the most significant part of today's announcement is not the growth delivered, rather the opportunity ahead". 

And chief executive Colin Porter is confident Joules can maintain momentum through the current financial year, "despite the uncertain macro-economic outlook".

"This confidence is supported by the growth in our customer base and our exciting new store opening plans, as well as a robust Autumn/Winter wholesale order book both in the UK and internationally," he said.

Stevenson predicts top-quartile return on capital employed, with management set to "drive channel-agnostic capital allocation to maximise returns". New space will be boosted by store relocations to larger sites, while US sales will benefit from bringing the distribution chain in-house.

Brokers Liberum has upgraded estimates by 10%, while finnCap's Roger Tejwani now sees forecast three-year adjusted earnings per share (EPS) compound annual growth rate (CAGR) of 26%. He also sees "scope for further upgrades as the US operations scale up".

Tejwani also upped histarget price target for Joules by 20% to 300p, valuing the shares at 26.5 times full-year 2018 adjusted EPS. While that gave upside when the broker sent its note to clients Tuesday morning, Joules quickly peaked at 305p.

Liberum thinks a forecast 2018 price/earnings (PE) ratio of 26.6 times currently is justified. "One needs to place this into context of a three-year EPS CAGR of 25%," it says. Further, it sees "numerous catalysts" throughout 2018 to support its new target price of 350p.

We noted last year how Joules' IPO lined the pockets of its big cheeses. Porter made a nice return on his 4% stake back in May 2016 before topping up his reduced holding back in November, buying 140,680 shares at 177p. They are now valued at over £400,000.

More impressively, founder and chief brand officer Tom Joule profited to the tune of around £97 million at flotation, but the former CEO remains the company's largest shareholder, with over 28 million shares held (32% of the equity).

Those are now worth almost £85 million. Get to that 350p target and they'll be worth almost £100 million.

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.