"I'm taking a right hammering this week (card, AA and now BON). Think (hope) all 3 have been oversold..."
Yes, me too KK... though I take some solace from the perspective that while it's one of these runs when it feels like all your holdings are just going down and down, my overall portfolio is down under 1% YTD. Just think what it might do if some of these dogs actually have their day!
CARD - ongoing margin pressures (which we knew all about) mean profits will be lower - but by around 5%, NOT the 40-50% relative to where we got to last year or to how much "analysts" thought this was worth only recently. All evidence suggests people really are still buying cards - and queueing up at the CF tills so to do. Long-term investment case unchanged.
AA - only new news is a broker report (!), highlighting plenty of caveats (none of which are new to us) and ultimately concluding the equity valuation is still just too cheap. Medium/Long-term investment unchanged (albeit a relatively risky one).
BON - LFLs are volatile with this one (not something we didn't know), but the FY outlook still promising, reflecting the initiatives and firmer grip of new management. Minimal exposure to various negatives (onerous leases, weak balance sheet, pension deficit, weak online presence) hampering other retailers (and similar), yet you wouldn't know if from the stock's valuation. Perhaps more of a medium term investment case rather than long - but unchanged!
It is at times like these that I have to remind myself that, as a long-term, contrarian and intrinsic value-orientated investor, I actively seek out such unfashionable, unloved and supposedly "challenged" situations - and hence I shouldn't really moan when market sentiment remains against them. I really should just "buy and forget", rather than spend all my time monitoring the minutiae of day-to-day progress - but then, how else would I fill my time other than shooting the breeze on here??
A positive at least is that much of the store sales decline appears to be moving to online sales,which indicates that customers appear to like the product offer merely changing their buying habits some perhaps after looking at the products in the shops later decide to buy online.Who knows?
Obviously you are still left with store overheads spread over fewer sales.At least BON is not locked into long store leases which is the worry with retailers now so it can close under performing stores reasonably easily and gives it the opportunity to negotiate keen rentals on other stores as & when they become due .Average outstanding lease is just over two years with almost none over 5 years.(Card Factory & ShoeZone are two other value retailers that have a similar lease profile).
The balance sheet is also in good shape and the company has a niche market,albeit a competitive one.Like its products it has to be a value proposition to be worth buying as I don't see much potential for re-rating........I am quite tempted.
"A 20% fall seems a little harsh considering profit expectations remain "in line". Obviously the fall is due to the decline in LFL sales, which investors and analysts seem unduly fixated on..."
Yes, the over-focus on LFL is one of my regular rants - it is a delta, not a quantum, and is only ever one part of the whole picture. For some stocks, only a small part.
The LFL data for BON has always been relatively volatile - in both directions. And given LFL is always comparing one volatile number to another, you have double volatility... the SP reaction is understandable enough in a very nervy market, particularly so with so many retail traps opening up day by day.
And we are only back to where we were quite recently, in SP terms, so most likely a case of "okay, let's go again!" This one is clearly going to stay volatile and subject to smackings whenever the data even hints at disappointing - but at the same time we have the relative comfort of all of ongoing self-help story, the strong balance sheet and entirely undemanding valuation.
See below for edited highlights from broker Investec today:
"Despite the difficult trading backdrop, management stuck to a more full-price sales/less discounting strategy for the second year in a row. As a result, gross margin improved but at a cost to sales...
Efficiencies and tight cost control means guiding to FY18 PBT in line with previous expectations assuming no material change in market conditions. Company-compiled consensus FY18 PBT is £8m vs INVe £8.5m... Cut FY18e and FY19e PBT by 6% and 5% respectively. Our forecasts assume positive Q4 sales and gross margin decline... We maintain FY19e growth assumptions, but off a lower FY18e base...
Valuation (CY18 PE 8.7x; DPS yield 6%) undemanding given solid balance sheet & self-help opportunities. While the shares are likely to react to the scale of the sales decline short term, we believe progress from the self-help strategy is evident. A more flexible business model is emerging. Further progress likely in FY19 with focus on more buying improvement, operating efficiencies, digital & driving loyalty. TP maintained with downgrade offset by peers re-rating."
I'm taking a right hammering this week (card, AA and now BON). Think (hope) all 3 have been oversold.
Bon, profit still in line with expectations and on-line sales increasing very nicely granted at the cost of store sales but surely on-line is more profitable if sales down 5.5% but profit still in-line...
A 20% fall seems a little harsh considering profit expectations remain "in line". Obviously the fall is due to the decline in LFL sales, which investors and analysts seem unduly fixated on. A decline in LFL can result in a lot of discounting to clear stock but in this case they have "adjusted their stock purchasing" to avoid that and gross margin percentage is actually slightly up. That combined with "tight cost control" means profit expectations remain in line.
It's true that the December sales performance in particular is disappointing, but it is only 5 weeks and I would think Bonmarche is a little less geared to Christmas performance than some other retailers.
"... Sainsbury in my view played a blinder buying Argos and hope they had a great Christmas and I'm glad to see Argos integrating into Sainsburys stores must have huge cost savings, WTB also holding as like card their Costa's are always busy and they might spilt Costa and P.Inn?"
Yes, my take on WTB is very similar to CARD. I am very happy with the long-term story and I am holding happily on for that - but on a strictly 2018 view, it is now harder to see the operational and/or valuation catalysts which will deliver the sort of upside I need to be seeing.
Upside, from up here @£40, of course... a different story when we were down not far above £35, only back in mid-Nov, not to forget. Even so, it was a tricky call (as it was with CARD) to leave it out of the 2018 list, with its omission at least partly a technical conclusion. The late-2017 rally seemed largely due to renewed talk of the Costa/Hotels split - and while I agree with you, I think this is the eventual end-game (and probably always has been), I don't see it this year, or indeed next, most likely.
If they are going to do it, they'll want to do it when (Costa) sales trends are somewhat firmer than they are likely to be near-term, when investment levels have reached more mature levels, and when they've had a chance to prove the potential from the foothold in China. So I can see management talking down demerger hopes for now - and possibly the SP with it, at least in the short-term (ie. H1 2018).
As for Sainsbury, I also agree on Argos - it'll (continue to) prove a good deal at a good time. But it's real worth to the group will only pay off over the medium term, and in the meantime it is the core grocery business where recent trends have been underwhelming, if not exactly disastrous. But as I say, the valuation doesn't demand too much, and I feel no compelling urge to bail at 240p... but if we do get back to 280p, or anywhere near, sooner rather than later, that might be the time to exit stage left!
Thanks for coming back Bill, since posting (forgot to ask about wtb ) My average price (div reinvested) is just shire of 77p. With that in mind thinking of taking my original investment out and see how 2018 goes for the balance and hopefully collect more div's but this time will probably take as cash and not drip. Need some capital for your 2018 selections after all
Card, I'm also holding however, I do have a sell order in place for a selection of shares I bought on a dip and is set at 333.
Sains and Wtb will be keeping. Sainsbury in my view played a blinder buying Argos and hope they had a great Christmas and I'm glad to see Argos integrating into Sainsburys stores must have huge cost savings, WTB also holding as like card their Costa's are always busy and they might spilt Costa and P.Inn?
Glad to see IMB & MKS are still on the list.
Glaxo is on my tracker and probably be the 1st purchase I make, when I make. as is Connect & WPP & ITV but ITV been there for a while!!
"... outside of the 10 for '18 will you remain a holder of Bon, Card, Sains for the foreseeable?"
KK - BON is the one I am currently unsure of. A great run at the last weeks of 2017, nice to see of course, but begs a few questions... Possibly just a reaction to encouraging interims, but an unusually delayed one if so? Or does the market know something we don't?? I wish I knew... and if it doesn't (and most often, it does NOT), then it could easily retrace significantly early in 2018.
I first bought in too early, though later "averaged down" so a cost-price around 115p and a decent enough return as things stand, though hardly spectacular. Not sure exactly when they'll update on Xmas trading (last year 20th Jan), but they could also be caught in the cross-fire of those peers updating earlier in the month, so if it's one to ponder, I need to be pondering it ASAP! The valuation is certainly not demanding even here, but no longer stand-out compelling - in absolute terms or relative to peers.
In contrast, I will definitely be holding on to CARD. The long-term story remains intact and highly attractive - I just have a couple of caveats over the 12 month horizon. The margin pressures will wash out of the equation soon enough but will likely persist through 2018, and the balance sheet is more mature now, so big special dividends are less likely (for now). Management will likely continue to take the "long view" (eg. preserve and entrench their USP advanbtage rather than rushing to shove prices up to mitigate margin pressures), and I think investors should align themselves accordingly, on a 3-5yr view. But if it proves me premature by delivering again in 2018 - so be it!
And no plans to exit my SBRY holding, which is not a huge one. If anything, this was my biggest disappointment of the 2017 list... I put a 290p 'fair value' target on it and a perfectly good H1 saw it get very close, but since then it's been all downhill - for the stock and for core operational performance, with some underwhelming reporting and messaging. It's still not at all expensive - particularly vs peers - but another down years for earnings (and hence divi) looks inevitable, and 'fair value' now is probably more like 260-270p rather than 290p. If it had stayed down at the 225p dip back in November I'd probably have named it for 2018 - but not now, and not enough.
As foreshadowed here and all relevant boards... 2018 trading from tomorrow, so time to repeat last year's "virtual portfolio" challenge. Same rules, as per the papers - equal weighted, valid for the whole year with no switching, full owning-up at year end!
Marks & Spencer
I retain a bias toward UK exposure and 'Value' (the two closely related, obviously), with an expectation that the UK domestic outlook will clarify satisfactorily (if not wonderfully) this year. But it's no slam-dunk... and so hedged with a decent slug of overseas earnings and a general focus on "stock specific" stories - with LLOY the only real pure play on 'UK PLC' and associated sentiment. Ultimately, well aware that it's near-impossible to avoid losers as well as winners, I have asked the question - can I see 15% over 2018 (plus divis)? Without necessarily much help from the wider market.
Four stocks stay in from 2017, with CPI, IMB, ITV and SGC still to justify their original inclusion and getting another chance (SGC was a close call). Bonmarche has done its job as "speculative" midcap retail play; VOD still looks fine to me but harder to see sufficient upside in either valuation or financial reporting; CARD and WTB were tougher choices, both still good for the long term IMHO but I see their respective attractions now more finely balanced against likely persisting near-term headwinds.
I will doubtless be elaborating on the case for each of the "new" inclusions in the course of the year. FWIW stocks actively considered but failing to make the cut (as well as CARD and WTB): Braemar and SBRY (from my 2017 Top 10), then Aviva, BT, Debenhams, Gattaca, Merlin, Morrisons, Trinity Mirror.
FYI I own 7 of the 10 stocks, with all of CPI (still!), WPP, GSK under active consideration (probably in that order). I'd be surprised if I didn't buy into at least one in the course of 2018.
That's it for 2017, in market hours anyway, so it is time to tot up the final results for my previously published 2017 Top Ten...
Q1 was not bad (in the end)... Q2 better, outperforming decently... Q3 not so much, a bit of a struggle throughout... and now a reasonable (if selective) Santa rally has delivered (belatedly) a decent enough Q4. It all means a positive absolute return for the year (+1.6%), albeit another good quarter for wider markets means I have underperformed the FTSE 100 by nearly 6% (and around 7% vs FTSE All-Share).
But it's not the full story - I went heavy on income plays, with dividends (including a couple of "specials") delivering a further 5.7%, around 50% more than the UK market yield. So I can point to a total portfolio return of 7.3% for the year - still below the 12% or so returned by the main UK indices, but somewhat nearer respectability - and preserving my status as (distinctly) average fund manager... making you some kind of return on your money, but not actually managing to beat, or even meet, an index.
Star performer, after a pleasing (albeit slightly suspicious) late run, was one of my small-cap speculatives, Bonmarche - up 60% for 2017! Then, at the other end of the size scale, comes Vodafone, an 18% return reflecting a year of solid success... just ahead of Card Factory (up nearly 17% after a rollercoaster ride), although CARD just edges out VOD in total return terms (+26% vs +24%). After that, a good Q4 sees Whitbread end the year up 6%, after 'promising' something much worse for most of it.
But that's it for gains, and 4 "winners" out of 10 doesn't really cut it, I concede. Both Sainsbury and Braemar ended near enough where they started (down just under 3%), but thereafter the disappointments pile up like roadkill... Imperial Brands falling 11%, ITV losing 20%, Stagecoach giving up 24% and Capita's year of woe and warnings means it brings up the rear, some 25% down - with some small solace that it's the only one I still don't own for real (but watch this space!)
How to rationalise this performance picture? Well, looking back at my original post, it seems I predicted it up-front a year ago - I quote... "a vague attempt at balance and diversification across the list, though it's probably still a bit too exposed to the UK economy - and hence any further Brexit downturn. Probably inevitable, given my usual bias towards 'value' and aversion to buying into momentum."
The hope was that the Brexit 'deal', and consequent UK economic outlook, would clarify - and while there's finally some sign of that now, for most of the year it's remained mired in the mud of uncertainty and ungentlemanly exchange. There is also the (related) theme of 'Value' staying out of favour - albeit with 'green shoots' starting to appear just as the snow comes tumbling - and getting ever cheaper over the year as the market found reassurance in "reassuringly expensive" havens of 'Quality' and 'Momentum'.
So what for 2018? "Double-down" on the combo of cheap UK and underappreciated Value, in the expectation (or 'hope'?) that "this time NEXT year, Rodney".... or capitulate and jump on the market bandwagon, trusting the wheels stay on for another 12 months? Anyone following my thoughts for any length of time will know the answer ... but either way, all will be formally revealed in due course with my Top Ten for 2018 - as I always promised, and likewise enourage others to participate.
FWIW my own 'real' portfolio fared better for 2017, up c.11.5% (total return of c.15%). Very nicely outperforming FTSE 100 (+7.6%) and All-Share (+9.0%) in both price terms and their total returns of some 12-13%, though lagging the Global Market return of 20%. Given I've owned 9 of my "Top Ten" stocks for most of the year, and that I didn't set out to pick bad stocks, you can deduce that much of my performance came from unexpected quarters... as good an advert as any for diversification - of one's own thought processes and
"... Looks pretty good, what will be the reaction?"
Muted, I would say... effectively no change from last week's closing level, as we speak.
I agree, the results at least look good, pretty much on all key metrics... but with a couple of caveats, in terms of the underlying direction of the business. They are still recovering from a pretty significant slump, hence the positive "growth" figures have to be viewed in the context of the lower previous base... and within the H1 figures, Q2 was quite a bit weaker than Q1. The latter is pretty much in line with the general industry experience, of course, but it's still a trend the market will latch on to, as is its way.
All that said - plenty of evidence that new management has a firm grip on the key moving parts of the business, and that financial performance is responding to this.
One big positive for me - extremely strong FCF in H1. Almost certainly exceptional and likely to fall back in subsequent periods, driven (partly) by big positive working capital improvement - but still, it's further (and possibly underappreciated) evidence of this renewed management grip on the business.
Still too cheap for me, in the context of both delivery to date and the evidence of management control - but we will doubtless now have to wait to see how they get through Xmas.
· Total revenue up 5.0% to £97.8m (FY17 H1: £93.1m)
· Combined LFL sales growth 4.3%; store-only LFL sales up 1.6%, online sales up 38.6%
· Product gross margin remained level with the same period last year
· In line with Board expectations, profit before tax of £4.2m (FY17 H1: £2.0m)
· Basic EPS was 6.8p (FY17 H1: 3.1p)
· Inventory levels at £23.5m compared to £24.8m at the end of FY17 H1
· Net cash of £14.9m at the half year end (FY17 H1: £9.8m)
· Interim dividend of 2.5 pence per share (FY17 H1: 2.5 pence)
· Grew market share in a difficult trading environment
· Improved cross-functional working has led to progress in each of the Company's five key strategic areas - product, online, loyalty, stores and systems/processes
· Product highlights include a relaunched, higher quality, more authentic, denim range
· Strong online growth, driven by multiple improvements to customer experience and supported by stronger product ranges
· Successful launch of in-store ordering takes Bonmarché a step closer to being a true multi-channel retailer and is popular with customers and store colleagues alike
· Progress continues on system upgrades expected to deliver longer term operational and customer experience improvements
Having now reached the end of Q3, it is again time to "own up" on YTD performance for my previously published 2017 Top Ten...
Having just edged ahead of the market by end Q1, and outperforming decently over Q2, I am disappointed and (moderately) shame-faced to report that Q3 has been a struggle, pretty much throughout. The portfolio is still just about above water in absolute terms YTD (+0.3%), but with the markets holding onto modest gains over the quarter, it means I am now underperforming the FTSE 100 by nearly 3% YTD (and around 4% vs FTSE All-Share).
Star performer is now Card Factory, and not for the first time - despite recent wobbles, up 22% YTD. But after that, success stories are thinner on the ground than they were - it's perhaps relevant that the original 'speculative' plays, Braemar and Bonmarche, come next (up 13% and 9% respectively), and then decent returns are sustained by both Capita (up c.6%, albeit well down on where it was at Q2) and Vodafone (up around 5%).
So half the portfolio is at least showing gains... and I probably also get a "pass" with Whitbread, which is breaking even, near as dammit (-0.3%). But after that, the tale of woes unfolds in chunky increments... Sainsbury down nearly 5%, Imperial Brands a full 10%, ITV losing 15% (at least, better than it was) and Stagecoach still lagging the lot, now just over 20% down.
For full disclosure, I continue to own 9 of the 10 stocks (to varying degrees of 'happiness'), and while Capita remains on the "watch and wait" list, I have yet to bite... maybe in Q4? Maybe not...
Needless to say, I remain optimistic for Q4 - well aware that I am now in the 'last chance saloon' when it comes to salvaging my performance (and my pride), for the 2017 'competition' at least. I will not deny outright ropey stock selection, at least in one or two cases, but I think there is a wider theme at play... 'Value' still out of favour and just getting cheaper as the market hides in reassuring (and "reassuringly expensive") 'Quality'.
As such, it's a broader tide that I think will turn - and indeed it could at any time, and with it (I am sure) my portfolio... but whether it'll be by the end of Q4 or later, we can only now hope and wait. But a big juicy takeover bid wouldn't do any harm... surely all of ITV, IMB and VOD cannot end yet another year without the long-rumoured (and long-overdue) tap-on-the-shoulder!?
Until such time, it will likely remain the familiar story of (distinctly) average fund managing - just about managing to avoid losing your money, but failing to beat an index...
"Bill - do know how big an expense this is, an what length of leases they have committed to?"
Games - looks like roughly £20m for stores (land and buildings) operating leases. I have glanced through the latest Annual Report - no disclosure I can see on total or average lease length, etc. Other than some vague comments on "sensible" rental rates and "flexibility", ability to close stores as required, etc.
They also refer to IFRS16 (the accounting change your refer to), which they'll have to report under from FY 2020... easiest to just quote it directly:
"This amendment is effective for the 52-week financial period ending 28 March 2020 and will require a significant change in the accounting and reporting of leases for the Group. The standard will require lessees to recognise assets and liabilities for all leases, with the exception of low value leases or where the lease term is 12 months or less. The impact on the Group is currently being assessed and it is not yet practicable to quantify the effect of the standard on these consolidated financial statements."
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