While there was insider buying throughout last year, the newly appointed CEOKevin OByrnemade a sizable investment of nearly £575,000 at 179p per share.
The investment indicates Mr. Kevin seems to have a plan to turn around the company which is going through a decreasing footfall and tough competition in the branded category.
Is a near "double-bottom" in £430 million discount retailer Poundland (PLND) worth backing? Being an actively traded FTSE SmallCap may contribute to volatility, but the chart since flotation in March 2014 shows a semblance of having formed one.
After plunging briefly below 140p in response to quite disappointing news on 14 April, the stock rallied firmly to about 175p, a level that could be seen as short-term resistance. Chart-focused traders will be interested to watch if another move up affirms a double-bottom, but meanwhile - what of the fundamentals?
Another sour lesson in private equity flotations
The stock's debacle from a 300p flotation price in March 2014 and a 420p peak a year ago affirms scepticism of "revolving door capitalists". Poundland started in 1990, its founder selling his stake for some £50 million and US financier Warburg Pincus buying the business for £200 million in 2010, then raising £142 million by selling half its stake to 16.4% in early 2015 when Poundland acquired 99p Stores. As with Debenhams (DEB), the cynical view is that this reflected quite a culture of wheeler-dealing to enhance progress and exact gains, leaving long-term shareholders with the risks.
The financial summary table shows good revenue growth and, broadly, an expansion of profits, but such a general high street retailer has become challenged to sustain the kind of growth expected by the stockmarket. Online sales were only introduced last autumn with delivery costing £4 unless you spend over £50 on £1 items - not exactly a compelling retail formula.
The February 2015 acquisition of 99p Stores Ltd for £55 million is now characterised as "mainly a property deal" to grow the Poundland estate. After the trading losses from 99p Stores proved worse than expected, management has had to achieve a 15-months' refurbishment in four months.
The latest update comes across well, excepting "a tough quarter for the core business" and like-for-like sales down 4.9% over six months to end-March. Analysts downgraded in response and there is also concern (e.g. from HSBC) over how the actions and investment needed to stabilise 99p Stores have compromised cash flow - such that the group now has net debt.
Aspects of this should improve with changes in working capital, but it poses questions for the extent of prudent dividend growth in the short term, up from 1.5p per share, on which a prospective yield of 3% is based.
The table shows very strong cash flow (from which dividends are paid), albeit historic figures. The 2017 price/earnings (PE) multiple may only be about 12 times, but that assumes record profitability; for the financial year just passed, the PE could be over 20 times. Without any margin of safety in key valuation metrics, the stock is, therefore, sensitive to news flow.
New CEO adds £574,782 worth of stock
Amid a steady trend of director/senior manager buying, the trade that stands out is the chief executive designate adding 321,107 shares at 179p in March, to own 340,000 overall. Kevin O'Byrne ought to have decent judgment of retail businesses, having been a director both of Dixons Retail and Kingfisher (KGF) - latterly as CEO of B&Q.
Mind how cash purchases by CEOs may later appear to involve "cost-averaging" when a board makes sizeable share option grants, but it underlines his belief in Poundland's potential - and, by implication, the medium-term synergy benefits of the 99p Stores' integration, as implied by brokers' forecasts for the 2017 year.
Weighed against this are general uncertainties for high street retail when Poundland has plenty of further challenges, e.g. a rollout of stores in Spain (under the Dealz brand) and a new multi-price approach. Also, the group is quite operationally geared, meaning variations in sales have a greater effect on profits.
It all makes for a wide range of analyst targets, from Haitong Securities, which lately cut from 140p to 130p
I appreciate the point you are making, a 1 pound anchor does eventually become out of date, but that's an imaginary boundary that will evolve when necessary. They already have more flexibly named brands in their portfolio, like Dealz or they can just rebrand in to a completely new name when time dictates.
The important point is that their simple catchy-named theme hits a sweet-spot which gives them immense success (reflected in the number of copy stores that sprang up). Importantly, it establishes the company as a value for money brand, with products so low in cost that you buy without a second thought (and ironically my local Morrison's now looks like a pound shop where 10 everyday items cost you about 10 pounds as well).
A few short term sustaining factors help; they have the power to get manufacturers to package products to their chosen size and price-point, there is generally low inflation, and China is still exporting global deflation', so maybe their label has another 5 year lifespan in this sweet-spot.
But when the time is right but they will simply re-brand from one sweet-spot into new one taking all their loyal customers and brand-value with them. That is what makes Poundland sustainable 20% growth so attractive at these prices, it is just as enduring as Aldi or Lidl's and is available for investing in as a plc.
The clue is in the title! £1 is all the are worth. Tesco and all the rest also sell lots of poundland products for less than a pound, their business model is shot and at present has no where to go but down. Have you been in their shops lately they are full of tat and woefully understaffed. Sell now before the share price reaches 99p.
The fall does look overdone, but on a long term basis, is Poundland sustainable?
If Poundland continues to expand it's building up a bigger and bigger exposure to what will be a realistic change at some point in inflation.
Inflation will kill the Poundland concept, as they are stymied by their inability to increase prices.
Also inflation will drive up staff costs, already now ready to jump in this years reported numbers with the new minimum wage.
If VAT is forced to rise, that will be another hammer blow to Poundland.
On top of this, you now see many other shops selling simple goods at the £1 or less level, like toothpaste, certain chocolate bars, soaps, detergents etc etc -- so the supermarkets and other discounters like Poundstretcher, B&M etc are positioning against Poundland, without the restriction of selling other higher priced goods.
Poundlands marketing is catchy and will stick with many, but the economics of rising prices will not help the business model longer term. There is only so far you can shrink the packages.
We had one smallish Poundland in West Bromwich until 8 months (Britain's second most deprived town) and now we have three, within 200 meters of each other. I can't quite work out how that makes good retail sense. We also have two massive retail park Poundlands within 3 miles. They are all pretty busy. Let's see.
I personally believe the fall is overdone, however, I'm currently sitting on a near 60% loss, therefore I'm being optimistic.
Banbury now has 2 Poundland's, one of them being a very recent conversion, unfortunately, they are within 100 metres of each other. The recently converted store is bigger and appears to have a wider range of stock, unfortunately, there were only a handful of people in it mid afternoon yesterday.
I presume there will be store closures where duplication such as in Banbury cannot be justified?
I don't really understand the pounding that they are getting at the moment when they offer everything that Tesco, etc. shares. don't.
They're growing at ca 20% per year; they offer a reasonable dividend which seems to be rising. Even if their earnings come in at the lower end of the range as guided, then the PE is still around 10.
With 99p stores, they've increased their footprint by 30% from spending just 15% of their value. Even if there's a few unexpected extra costs along the way that's still a bargain.
And their shops seem to be the busiest on the high-street, and busier than the supermarket-locals.
What's not to like? - It's like having a Lidl or an Aldi that is publicly listed, and 20% growth is offer without any premium.
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