Tough questions

Revenue rose 8.4% in the six weeks to 5 January, thanks in part to online growth of 34.1%. The fact that sales from physical stores and concessions (a lot of the latter are in Debenhams) grew by only 1.6%, however, shows just how tough things are on the high street, leading management to report that overall sales came in “below expectations“. 

The outlook isn’t great either. As a result of ongoing uncertainty, Quiz saw fit to revise its revenue and earnings forecasts for the full year to roughly £133m and £8.2m respectively — lower than what the market previously expected.

In a further blow, the former isn’t likely to cover the additional employee, marketing and depreciation costs incurred by the company over the last year as part of its growth strategy. Gross margins are also expected to be lower as a result of the “higher than anticipated level of discounting” — something that other retailers have reported on over the last few days. 

For me, there are two points that all investors can take away from all this.

First, today’s reaction from the market underlines just how dangerous it can be for a company to rely too much on one trading period – something that Quiz’s management previously flagged.  

Second, the 87% reduction in the value on the company since last July (and taking into account today’s additional drop) is yet more proof of how risky investing in market minnows in hyper-competitive industries like clothing can be, not to mention the importance of keeping portfolios sufficiently diversified.

On a more positive note, at least Quiz isn’t drowning in debt. The company had a decent net cash position of £12.3m at the end of the reporting period relative to today’s market cap of £33m. One might also argue that the shares — already trading on 7 times forward earnings before today — offer quite a bit of value for those brave enough to buy (although always evaluate your own risk tolerance and investing horizon). 

In sum, Quiz looks cheap but it does have an increasing number of questions to answer.

No exception 

Of course, it’s not just struggling market minnows that have been impacted by the speedy reduction in consumer confidence in the final few months of 2018. Back in December, shares in online fashion behemoth ASOS (LSE: ASC) tanked 40% on a surprise profit warning. 

But does the decent bounce in its shares since then make it a buy? I’m still wary.

For one, the company still looks too expensive. I said this when the stock was trading at around 5,000p back in October.  It might look a whole lot cheaper today — at almost 2,900p — but each share of ASOS still changes hands for almost 55 times earnings, even if the price/earnings to growth (PEG) is starting to look more reasonable. The behaviour of shoppers over recent months is a sign to be wary of all retailers, in my opinion, but particularly those on still-frothy valuations. 

Sure, ASOS may turn out to be a ‘safer’ bet than Quiz thanks to its lack of exposure to the high street, but it’s worth remembering that no company is worth buying at any price.

Profit warning

I was later shocked by a profit warning on 30 August, apparently triggered by weak trading since June and poorer than expected adoption of one of Xaar’s latest printheads. The share price dropped off a cliff, losing 30% of its value on the day.

But interim results Wednesday, together with the announcement of a commercial success, caused the price to pick up 6.5% in morning trading, so maybe the fall has been overdone.

Underlying revenue for the half dropped by 39%, with most of that caused by falls in legacy ceramics printing, but the slower update of the firm’s Xaar 1201 printhead also played its part. We’re also looking at an adjusted pre-tax profit of £3.2m, down 60% on the first half of last year, with adjusted EPS cut in half to 4.6p.

And that previously impressive dividend has taken the brunt of the crisis, slashed to 1p at the interim stage from 3.4p. Is there any good news?

Long term?

Chief executive Doug Edwards continued the theme that it’s all down to the ceramics business and the disappointing sales of that new printhead, but remains confident that the “long term opportunity for Xaar remains very significant.”

Then there’s the news that Windmöller & Hölscher have decided on the Xaar 5601 printheads for the development of a single-pass press for flexible packaging. Mr Edwards described the deal as a “significant milestone for Xaar.”

Full-year forecasts have been slashed and the dividend has taken a break, but short-term hard times can be great for recovery investors — just as long as there are no further profit warnings.

Fashion star

Online fashion retail is eclipsing traditional high street shops these days, with Boohoo Group a recent darling with growth investors — though its share price looks suspiciously like it’s following a similar roller-coaster trajectory to ASOS before it.

Quiz (LSE: QUIZ) is the latest comer to the scene, attempting to reshape itself into an online destination for the current generation of fashion shoppers and away from its solid bricks-and-mortar legacy. Its first set of annual results as a listed company looked impressive enough.

An AGM day update on Wednesday painted a picture of everything going to plan, with the firm reporting a “positive customer response to Quiz’s product range over the summer.” Partnerships with Next and Zalando have boosted the company’s online presence, but this year Quiz has also been seeing stronger growth through its own websites.

Good buy?

There’s a bit of a hit from Quiz’s association with House of Fraser following that company’s troubles, but Quiz reckons it’s “on track to deliver market expectations for the full year.”

Would I buy the shares? Well, they’re priced a good deal more cheaply than those of ASOS and Boohoo, at least on forward P/E terms. There’s a multiple for Quiz of 21 for this year, dropping to 17 based on 2020 forecasts, while ASOS and Boohoo are facing huge P/E valuations of 63 and 44 respectively.

I do see some volatility risk in the medium term here, but I’m cautiously optimistic about the prospects for Quiz in the long term.

Judging by today’s trading update from the Florida-based firm, the current market cap of £220m could grow still grow quite a lot as its CEO reported strong overall sales growth and was bullish in saying there were “significant opportunities that lie ahead.”

This isn’t surprising given that the products have a loyal customer base among construction firms needing to ensure multi-story warehouse floors are perfectly level to allow end-use customers ranging from IKEA to Mercedes-Benz and FedEx to store millions of dollars of goods safely, efficiently and to increase automation opportunities.  

From 2014 to 2017 annual revenue rose from $59.3m to $85.6m with adjusted EBITDA up from $15m to $28m over the same period. Looking ahead, I reckon there are plenty more growth opportunities as the firm’s sales in its two largest markets, the US and Europe, continue to steadily rise. And with sales in these markets contributing to just $70m in revenue last year there is still clearly lots of potential in the multi-billion-dollar construction markets on both sides of the Atlantic.

And while Somero’s operations in the massive Chinese market are taking time to take off, there is certainly great potential here in the long term, as well as from its constant development of new machines that has helped it into markets such as that for working on high rise buildings. With a valuation of just 16 times trailing earnings while kicking off a 3.47% dividend yield, Somero is not exactly priced like the high-growth company it is, although this isn’t a shock given its reliance on the cyclical construction industry.

Considering its growth prospects in developed and developing countries, alongside its conservative net cash position, hefty dividend and undemanding valuation, I reckon the stock could continue to generate huge returns for investors if the global economy continues to kick on.

And a more aspirational option

One company trying to generate returns as spectacular as Somero’s is fast fashion retailer Quiz (LSE: QUIZ). So far, it is doing fairly well in its quest to replicate success stories like Boohoo, as revenue for the year to March jumped 30% to £116.4m, driven by online sales growth of over 150% to £30.6m.

Alongside triple-digit digital sales growth, the company’s plan to roll out further stores in the UK and gin up international online revenue is working well. That said, unlike newer fast fashion retailers, it will still need to work hard to refashion itself as a must-visit online option rather than the budget shopping centre stalwart it has been since its founding in 1993.

But with operations solidly profitable, and cash on hand to fund a big marketing budget and infrastructure investments, I wouldn’t count the company out. Fast fashion retailers, and Quiz in particular with its rich valuation, may not be my cup of tea given their unproven longevity and the fickle nature of young shoppers, but investors looking for the next Boohoo may find it worth digging into Quiz as I’m sure the sector has already minted a fair few millionaire investors.

The company, which was founded in 1993, was floated on AIM in July last year at 161p a share and I was impressed by its half-year results in November, rating the stock a ‘buy’. I maintain my stance on the back of today’s full-year numbers. I reckon this specialist in occasionwear and dressy casualwear has every prospect of continuing to outperform the FTSE 100.

A fast-growing business

Today’s results showed 30% year-on-year growth in group revenue to £116.4m. UK stores and concessions increased 12% to £64.4m, online rose a spectacular 158% to £30.6m and international sales grew 32% to £21.2m.

The omnichannel strategy is clearly working well and the company is investing for growth across its business. It currently operates 71 stores in the UK and the board believes that there’s potential for a further 40 to 50 stores in the medium-to-long term. International expansion represents a significant opportunity, with the company using multiple routes to international markets, including online, as well as standalone stores, concessions, and franchise and wholesale partners.

Attractive valuation

As the company is investing for growth, profit is not increasing as fast as revenue at this stage. It reported a 20% rise in underlying profit before tax to £9.8m and a 22% increase in underlying earnings per share (EPS) to 6.48p, a little ahead of City expectations of 6.3p. Net cash on the balance sheet at the year-end was £9.2m and the board declared a small maiden dividend of 0.8p.

Ahead of today’s results, analysts were forecasting EPS of 8.05p for the company’s financial year to March 2019. The valuation on this basis is attractive, in my view. The price-to-earnings (P/E) ratio is 21.2 and with EPS growth of 24.2%, the price-to-earnings growth (PEG) ratio is 0.88, which is on the good value side of the PEG fair value marker of one. A forecast dividend of 1.73p gives a prospective yield of just over 1%, as the board pursues a progressive dividend policy.

Good-value proposition

AIM-listed personal goods firm Swallowfield (LSE: SWL) has been around since 1876. Its market capitalisation is £56m at a current share price of 325p. The shares have lagged the FTSE 100 so far this year, having declined 5.1%, but have more than tripled over the last three years. This has been due to new management in 2014 being successful in its aim of exceeding Swallowfield’s historical profit norms and shareholder returns.

The company formulates and manufactures products for many of the world’s leading personal care and beauty brands. It also has a growing owned-brands business, which represented 24% of last year’s group revenue of £74.3m.

For the current year ending 30 June, we’re looking at a forecast rise in revenue to £76.2m and a 33.3% increase in EPS to 23.6p. This gives a P/E of 13.8 and a PEG of 0.41. Add a forecast 6.15p dividend, giving a handy yield of 1.9%, and I see a good-value proposition here and rate the stock a ‘buy’.

With this in mind, I was drawn to today’s latest update from small-cap, omnichannel-based women’s fashion retailer Quiz (LSE: QUIZ).

Strong online sales

Interestingly, it would appear that the positive trading momentum highlighted in January has continued.

Revenue rose by 30% to £116.4m in the 12 months to the end of March with sales in its UK stores and concessions increasing by 12% to £64.6m (thanks to a combination of “strong like-for-like performance” and new store openings).

The biggest jump in sales, however, was seen online. Thanks to “increased and effective marketing spend” and growth in the product range (e.g. bridalwear and the plus-size Curve range), revenues here rocketed 158% from just under £12m in the previous financial year to £30.6m in 2017/18. Having hitherto benefited from selling its wares on third party websites, the company now believes that the launch of own language international websites will help drive growth going forward.

Any negatives? There was mention of higher operating costs as a result of “earlier than anticipated” investment in “central functions“, including recruitment for its buying, merchandising and marketing teams. Money was also spent on expanding the company’s distribution centre and IT resources. Nothing too concerning though.

No, the main problem with Quiz still seems to be its rather steep valuation. Despite the aforementioned negative sentiment towards retailers, the company’s stock still traded at 24 times forecast earnings before today’s statement. Sure, that’s not as high as online giant ASOS but it’s still a fair bit higher than, say, Superdry or Ted Baker, both successful brands that have an established presence in overseas markets. I also still need to be convinced by CEO Tarak Ramzan’s assertion that the company has a “distinct USP“, or at least qualities that make it a safer bet than its peers. 

Quiz shouldn’t be ignored, in my opinion, but it’s still not a screaming buy.

Value trap

If you want an example of a stock that fully warrants the fall in its share price, look no further than Debenhams (LSE: DEB). Despite selling the aforementioned small-cap’s clothing, the department store group continues to underperform and remains one of the most shorted companies on the market.

Trading over recent months has been awful with price slashes and clearance sales failing to bring shoppers to its doors. With this in mind, February’s announcement that 320 jobs would be cut as part of a management shake-up wasn’t entirely unexpected. Arguably more surprising was March’s news that Mike Ashley-led Sports Direct had increased its holding in Debenhams to just under 30%, stating that it saw “huge value” in a strategic partnership between both companies. 

While a price-to-earnings (P/E) ratio of just 6 for the current financial year may attract bargain hunters, I remain convinced that the shares are cheap for a reason. Traders may profit from any hint of a reversal in fortunes and shorters closing their positions (interim results are out next Thursday) but with online competitors continuing to steal custom, I find it difficult to see how Debenham’s long-term prospects can be anything other than bleak. 

Perhaps it was the already-rather-rich initial valuation or the gradual realisation of just how much the company will be required to spend on marketing to compete with bigger peers in the hyper-competitive industry in which it operates. Regardless, shares had fallen 25% from their peak at the start of August to 150p before this morning.

Will today’s Christmas trading update be the catalyst for a sustained reversal in the company’s fortunes? Let’s check the figures.

Questions answered?

In the seven-week period from 19 November to 6 January, group revenue rose just under 32% over the same period the year before. According to today’s statement, this was in line with expectations, reflecting “continued good growth” across the business and an “increasing awareness of the Quiz brand“.

In addition to “strong full-price sales” in the lead-up to the festive break, the small-cap achieved online revenue growth of 119% over the period through its own website and third-party retailers. Overseas sales also soared by just over 51% as a result of new store openings in Spain, decent performance in Ireland and increased sales by its franchisees. In the UK, sales at the company’s high street stores and concessions increased by 11.6%.

While it must be remembered that Quiz was starting from a lower base compared to other companies, these numbers do succeed in making me question whether investors have been too hard on the stock to date. Moreover, Quiz’s price-to-earnings valuation of 23 for the current financial year is softened by a PEG ratio of 1, suggesting that prospective owners wouldn’t necessarily be over-paying for growth. 

Whether the company can replicate the success of other fast fashion rivals remains open to debate and, for this reason, I’m still reluctant to invest. That said, today’s numbers are encouraging and a gradual recovery back to previous highs certainly isn’t out of the question.

Huge potential?

For a complete contrast to the share price performance of Quiz, you can’t do much better than online fashion giant ASOS (LSE: ASC). Despite its already nosebleed-inducing valuation, shares in the £5.7bn cap AIM-listed company rose 32% over 2017. Holders will be hoping for more of the same in the run-up to (and perhaps beyond) the company’s latest trading update towards the end of January.

I see no reason why positive sentiment can’t continue. As well as revealing a strong set of full-year results back in October, the company announced it had increased its sales growth expectations for the 2017/18 financial year to 25%-30%. With improvements to its customer offering (including new payment methods and additional language sites) and more planned investment over the next year, ASOS is now targeting a 60% increase in unit capacity and around £4bn of net sales.

Trading on 71 times forecast earnings for the current year, it is without doubt priced to perfection. Nevertheless, with an increasingly large share of the UK market and “excellent” recent performance overseas, I still think the company is worthy of investment, particularly if CEO Nick Beighton is correct in his belief that the potential for the company remains “huge“.

Quiz questions

For the six months ended 30 September, it posted a 35% increase in both revenue and underlying earnings per share (EPS). Statutory EPS was down 3%, due almost entirely to the costs of its flotation (at 161p a share) on AIM in July.

I wrote an in-depth review of the company shortly after its listing, when the share price had risen to 190p. I thought it looked a decent business with good prospects but I felt the valuation of this omnichannel company had been bumped up too high by management talking up its digital offering. I suggested: “You’ll be able to pick the shares up below 190p in the coming months.”

So, where are we four months on? What do today’s results tell us? And what of the current valuation?

I’m impressed

The 35% increase in first-half revenue resulted from a 15.2% advance in UK stores and concessions, a 26.1% rise in International and a whopping 204.6% uplift in Online, which now accounts for 24.6% of group revenue compared with 10.8% a year ago.

The online growth came through QUIZ’s own website, a number of third-party websites, as well as the commencement of sales on the Next and Zalando websites. I’m impressed and believe QUIZ merits a somewhat higher valuation than in my original assessment.

The shares closed yesterday at 157.5p but are currently up 5.7% at 166.5p. The market cap is £206.8m and trailing 12-month sales are £104.4m, giving a price-to-sales (P/S) ratio of two, compared with 2.6 in July. This looks good value to me and while there are always higher risks with a small-cap with a short history as a listed company, I’m now inclined to rate the stock a ‘buy’.

Packing a punch

Macfarlane is a small-cap company I previously rated a ‘buy’ at 62p when I wrote about it ahead of its annual results in February. This packaging specialist, which is growing fast — organically and by acquisitions — in a fragmented market, is currently trading at 77p, giving it a market cap of £121m.

The group has three divisions. In Packaging, it’s the leading UK distributor of a comprehensive range of protective packaging products. In Labels, it designs and prints high quality self-adhesive and resealable labels, principally for fast-moving-consumer-goods customers in the UK, Europe and the US. In Packaging Design and Manufacture, it designs and produces protective packaging for high value, fragile products.

In an update on this year’s trading last week, the board said it “remains confident that our full-year expectations will be met.” The house broker forecasts EPS of 6.09p, giving an undemanding price-to-earnings ratio of 12.6. And with EPS of 6.09p representing over 30% growth on last year’s 4.67p, the price-to-earnings growth ratio is a cheap 0.4. So, despite the rise in the shares since February, I continue to see good value here and rate the stock a ‘buy’.

While Boohoo is no doubt growing at an incredible rate, investor enthusiasm towards the retailer has pushed the stock’s valuation up to an eye-watering P/E ratio of 86.8. That kind of sky-high valuation doesn’t leave a huge margin for error, and can result in investors getting their fingers burnt if the company fails to meet expectations. For example, since Boohoo revealed half-year revenue growth of 106% in late September, the stock has fallen 30%. 

With that in mind, today I’m profiling another fast-growing fashion retailer that trades at a more reasonable valuation. Could this stock be a better investment?

Recent IPO

Don’t be surprised if you haven’t heard of Quiz (LSE: QUIZ), as the retailer only became AIM-listed  in late July. The company priced its IPO at 161p, yet today the shares trade for 190p, a rise of 18%. However, I believe there could be more gains to come.

It is a UK-based global womenswear company, that focuses on providing occasionwear and dressy casualwear to 16-35 year olds. The retailer operates a multi-channel approach, selling its clothes both online, and through a network of international franchise stores, concessions and wholesale partners. The company’s ‘just in time’ model enables it to respond in real time to new trends as they emerge, producing high-quality, fashionable clothing within a matter of weeks.

A trading update today reveals strong momentum at present. For the six months to the end of September, group sales rose 35% to £56.1m, and online revenue increased 204% to £13.8m. Chief Executive Tarak Ramzan commented: “Our customer base is growing strongly and we are confident of delivering further growth.”

Quiz vs Boohoo

So how does it compare to Boohoo? Quiz has generated sales growth of almost 50% over the last two years, and City analysts forecast top line growth of 30% and 29% this year and next. In comparison, Boohoo has grown its sales by 110% over the last two years, and analysts forecast growth of 85% and 39% this year and next. Boohoo is the winner here. Similarly, looking at earnings, Quiz is expected to record a 20% increase in EPS this year, followed by a 23% rise the year after. In comparison, analysts expect a 26% rise in EPS this year for Boohoo, and a 31% rise the year after. Once again, the bigger firm is the winner.

However, analysing the valuation of both companies and more specifically, the P/E-to-growth (PEG) ratio, the numbers tell a different story. Boohoo, with its £2.18bn market capitalisation, currently trades on a P/E ratio of 86.8, falling to 68.6 on this year’s estimated earnings. The stock’s PEG ratio is 3.3. But Quiz, with a market cap of just £232m, currently trades on a P/E of 35.6, falling to 29.7 on this year’s anticipated earnings. The PEG ratio is much lower at 1.8.

This suggests to me, that while it’s clear Boohoo is growing at a faster rate, investors are paying a hefty premium for shares in the larger retailer. For fast growth at a more reasonable valuation, Quiz may be the better stock of the two, in my opinion.

Revenue rockets

The figures really speak for themselves. Revenue soared 106% over the six months to the end of August with adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) coming in just short of £28m – a 68% rise compared to the same period in 2016. A 2% reduction in gross margin (to 53.3%) was justified through planned investments in IT and warehousing as part of the company’s growth strategy.

As a result of sales rocketing 289% on the prior year to £72.7m, PrettyLittleThing was the standout performer of the company’s three brands. In addition to exceeding their expectations, joint CEOs Mahmud Kamani and Carol Kane stated that cracking international sales had confirmed the brand’s “considerable potential“. Revenue from boohoo and the recently integrated Nasty Gal hit £181.8m and £8.4m, respectively.

Perhaps the most significant news, however, was the raising of guidance on revenue growth for the full year (to around 80% from 60%). Factor in the firm’s excellent progress overseas (handy as we approach Brexit), a cash position of almost £120m, and a clear advantage when it comes to marketing/social media proficiency, it seems logical to assume that boohoo’s shares will resume their march north.

Overall, I remain bullish, despite the altitude sickness-inducing valuation of 88 times forecast earnings and the fact that, with a market capitalisation already approaching £3bn, a slowing of growth at some point is inevitable. While it makes sense for holders to bank at least some profit at some point (which could be just one of the reasons for today’s 9% sell-off in early trading), I think boohoo remains a quality firm that could still make investors considerably richer.

Questions remain

I’d certainly back boohoo over newly-listed, Glasgow-based clothing retailer Quiz (LSE: QUIZ), despite the latter appearing to have a lot going for it.

In addition to using the same test and repeat model operated by the former – making small quantities of a wide variety of clothes before ramping up production of the best sellers – the £222m cap possesses a 300-strong estate of standalone stores and concessions on relatively short leases. That means it can target high street shoppers in addition to those who prefer to buy online.

Operating margins and returns on capital are more than decent. Valuation-wise, shares in Quiz are also far cheaper than those of boohoo (albeit still very expensive at 28 times forecast earnings).

That said, I don’t think Quiz has all the answers. The company’s online presence is a lot smaller than that of its larger peer and a huge marketing spend will be required to ensure it remains competitive. There’s also the fact that many of the company’s concessions can be found in Debenhams (whose stores aren’t exactly bursting at the seams with customers right now). What’s more, there’s nothing to stop boohoo building a physical presence if it really needed to.  

Given that its stock has already fallen 10% in price from the peak of 198p achieved back in August, prospective investors might be wise to delay purchasing shares in Quiz until after the company releases a pre-close trading update on 11 October. 

Could it be a millionaire-maker stock? After all, AIM’s biggest company, Asos, has delivered a  28,000% return since floating in 2000. You’d be a millionaire today if you’d invested just £36.

Quiz’s biz

Quiz describes itself as “an established and distinctive omnichannel and international own brand in the women’s value fast fashion sector [with] a focus on occasion wear and dressy casualwear primarily for 16-to-35 year-olds.”

The group has 73 standalone stores and 165 concessions in the UK and Ireland and 65 international franchise stores, concessions and wholesale partners in 19 countries. It also operates online through its website and apps.

Share price movements

Before considering such things as revenue and valuation, let’s have a quick look at Quiz purely in terms of the post-IPO share price movements of its predecessors Joules and Boohoo:

Joules and Boohoo saw big rises on the first day of trading. However, in both cases you could have subsequently picked up their shares cheaper. And, in the case of Boohoo, cheaper than the IPO price. On this basis, it may be over-early to pay as much as 190p for Quiz’s shares.

Growth

The fact that pureplay online retailers like Boohoo are commanding much higher valuations than multi-channel operators like Joules and Quiz appears not to have been lost on the latter’s management and advisors.

Quiz’s AIM admission document contained three times as many mentions of the words “e-commerce”, “online”, “digital” and “mobile” as Joules’ did (a total of 126 versus 42). The table below, showing online revenue as a percentage of total revenue, provides something of a reality check.

While Quiz believes it can grow online revenue to 35% in the medium term, such a target also appears well within the grasp of Joules. I’ll also note that despite Quiz’s proportion of online revenue expanding more rapidly than Joules’ over the last five years (as shown in the table above), the latter’s total revenue has increased at a faster compound annual growth rate (CAGR) than Quiz’s, as shown in the table below.

Valuation

Boohoo’s growth is streets ahead of its multi-channel rivals and we should not be surprised if it rates at a significantly higher valuation. I would suggest Quiz merits a rating somewhere on a par with Joules. The table below shows some price-to-sales (P/S) ratios for the three companies — the P/S being, in my view, an appropriate valuation measure at this stage for these fast-growing, land-grabbing businesses.

Quiz looks a decent business with good prospects. However, I can’t see it merits a sizeable premium to Joules on current evidence. I suspect that, as we’ve seen in the past, investors are showing a bit of initial over-excitement about a market newcomer and that you’ll be able to pick up Quiz’s shares below 190p in the coming months.