Purplebricks (LSE: PURP) share price slumped as much as 12% in early trading this morning after the hybrid estate agent announced a U-turn on its international expansion strategy. It also announced the departure of founder and chief executive Michael Bruce “with immediate effect.”
Here’s my view on what today’s news means, and what I’d do about Purplebricks shares.
International operations
The company said it’s pulling out of Australia after two-and-a-half years. It blamed “increasingly challenging” market conditions “combined with some execution errors” for the business failing to deliver the progress management had expected.
It’s also launched a strategic review of its US operations. The board also slashed investment in marketing and other overheads while it examines “options for delivering the next phase of growth in a more effective and cost-efficient way including more closely considering the opportunities and risks associated with a materially scaled back US business.” A further announcement on the strategic review will be made “in due course.”
The company said its Canadian business “continues to perform well and trading is in line with management’s expectations.” This was an existing business, DuProprio/ComFree, “with similar aspects to Purplebricks,” which the UK group acquired last year.
The key takeaway from today’s news is that Purplebricks’ own efforts to establish international operations (in Australia and the US) have come up well short of hopes.
Over-ambitious
Many of us here at the Motley Fool had warned readers the company’s expansion strategy was high risk and over-ambitious. As such, it’s no surprise its architect Michael Bruce has fallen on his sword. The board has appointed Purplebricks’ chief operating officer (and former managing director of Moneysupermarket.com) Vic Darvey to chief executive.
Non-executive chairman Paul Pindar took the opportunity today to apologise to shareholders. He added: “With hindsight, our rate of geographic expansion was too rapid and as a result the quality of execution has suffered. We have also made sub-optimal decisions in allocating capital. We will learn from these errors and will not make them again.”
Sceptical
Updating on its core UK business, the company said it continues to outperform in a “challenging” market, and reckons “there remain many opportunities for further profitable growth and this will be a key area of focus going forward.”
However, I’ve long been sceptical about the long-term viability of the Purplebricks business model, noting, in particular: “It seems Purplebricks has to continually ramp-up marketing, but is getting a diminishing revenue return from it.”
The company’s share price has been in a long slump since hitting an all-time high of 525p in summer 2017. Trading at around 125p, as I write, having recovered some of its early losses, the market valuation of £380m still looks over-optimistic to me.
Major backer Neil Woodford trimmed his stake in the company to 28.88% last month, selling close to a million shares. The departing founder has also previously sold shares, and whether he’ll ditch his remaining 11.02% holding remains to be seen.
Personally, I’ve always had Purplebricks tagged as a stock to sell, and continue to see it that way.