Shares I looked at over the past week (6th June 2024)
Digging into Burberry, Topps Tiles, and Tandem. But did I end up buying any of them?
Burberry (BRBY)
What: World famous luxury brand that is currently in the doldrums due to the slowdown in luxury consumer spending. FY results out to Mar24.
My comments:
Pretty dire results, especially Q4 saw a worsening of revenue drop YoY. Pretty much double digits negative everywhere geographically compared to low single digits for the FY.
You know things are bad when management already admit H1 (Apr24-Sep24) is going to be very bad, so early on. And the dreaded phrase “we will start to see the impacts of our actions in H2”. Which means maybe some improvement to the financials in Q4 (Jan25-Mar25) onwards only.
The £299m bond is still a non-issue at the moment, given that the maturity is Sep25. But how can they negotiate refinancing with H1 results going to be bad? They can’t exactly wait till Q3 (Oct24+), Q4 (Jan25+) start showing better results, as that’s cutting it too close. I see a potential equity raise of say £150m, £200m as sensible. Doable, on the current £3bn+ market cap without huge dilution. They could pay off the debt with their current gross cash, but that will leave little (c£60m) headroom for working capital expansion once the recovery begins.
I think broker forecast decreases still have some way to go over the next few months, as H1 “dire-ness” crystallises. Currently 63p EPS average forecast, but my probable worse case scenario is 40p EPS for FY Mar25.
Medium-term, I think they can get back to c80p EPS. So that at least supports the current SP nicely, at a 15-20x PE ratio.
Verdict:
I’m going to continue keeping this on the watchlist.
A question at the back of my mind is whether we will see the same level of luxury goods demand going forwards, as seen in 2010-2022? That was the QE times; money sloshing around, trying to find a home, some “invested” into luxury goods. Money is now more scarce, psychologically less “frittering away” on luxury goods to come?
Also as Apr-Sep25 trading is going to be weak, I think there is a very good chance of further EPS forecast cuts. I don’t see any catalyst for a share price re-rating.
Outside bull case is a bid from PE or an industry player. Possible, as Burberry could be seen as cheap by any medium-term or long-term evaluation.
Topps Tiles (TPT)
What: The largest tile retailer in the UK. Has £1 out of every £5 spent on tiles. Mostly B2C retail via physical locations, but also has a B2B arm, as well as online pureplay eCommerce brands (Pro Tiler, Tile Warehouse).
My Comments:
HY results to Mar24 made grim reading. Sales down -5.8% YoY. LfL sales -9.2%…! Adj PBT dropped -30% YoY due to operational gearing, due to fixed cost of stores and staff.
Despite this, Topps Tiles seem to enjoy a healthy competitive position. Market share has risen (claims management) despite sales drop. And, gross margin increased in their main Topps Tiles division, signifying competitive strength?
Leading indicators such as new housing starts, housing transactions still in the doldrums, so H2 results (Apr24 to Sep24) likely to be poor. First 7 weeks already poor, sales down -7.3% YoY.
As they hit their prior strategy of “£1 out of every £5 in UK tiles market” early, they have now launched their new strategy… “Mission 365”. To grow revenues from c£255m run-rate currently, to £365m in the “medium term”. There are 5 pillars to the strategy, each of which will contribute only tens of millions of extra revenues each. So none of them hugely transformative, all incremental initiatives. Still, if they hit their ambition, EPS will be 11.4p or higher, more than double the highest ever achieved since 2018.
I fear management attention might be too stretched? Topps Tiles brand did 85% of total revenues. Yet, a lot of their strategy is to expand the tiny parts of their business currently: B2B, online pure-play, new product categories… and none of them will be more than 10-20% of total revenues at the end of the new strategy period?
Consensus broker forecast is currently 3p for FY24. I think there’s a big risk that will be missed, if the current poor momentum continues. I think EPS might actually come in like 2.3p, maybe 2.5p if I’m generous, for FY Sep24.
Verdict: I therefore think the current SP above 40p is a bit nuts; even giving a generous 15x PE ratio to my FY24 estimate of 2.3p would be 34.5p. So I am not a buyer at the current level. It would take a much lower than 30p price to tempt me.
Tandem (TND)
This was a COVID darling, as they had all the right products to ride that boom; bicycles, outdoor home furniture, toys. A bit of a tiny sprawling conglomerate; they sell everything from licensed branded toys to electric golf buggies, patio awnings to mountain bikes. They have some own brands, but also distribute other brands. They sell direct, but also via retailers. UK focused.
My comments:
I was initially drawn to the huge discount to NTAV; something like 300p+ of NTAV, compared to a share price of only 175p! Digging further, majority of the NTAV is in a freehold set of buildings + land, which is their office and warehouse in Birmingham. Independently valued by JLL in Feb23, so fairly recently. Cash is thin, but they have just renewed banking facilities, and run a positive current account position as of Dec23.
Sales last year fell off a cliff as the whiplash from the Covid boom hit hard. “Toys, Sports, and Leisure” category down -32% in sales, ouch! “Home & Garden” down -27%. Bicycles (non-electric) down -12%. The only category to be up was eMobility (electric bikes, electric golf carts) which were up +44%.
Management blame all the usual suspects; COVID boom, retailers overstocking, poor consumer sentiment and spending, etc. Yes, some of that is fair to blame, but those negative numbers above are huge, and I wonder if it their products not being competitive anymore?
Aiming to release 200 new products in 2024…! And this is a company that only did £22m of revenues last year. That is a lot of effort and investment spent on new products for such a small company. Are management just busy fools, churning out quantity but not quality? Maybe it is them realising that their current product portfolio is weak, hence the big sales drop in 2023?
Management seem to have been there forever. Chairman was former CEO, been at the company since at least 1990. The CCO and Group Commercial Director have been there decades. The current CEO is new; only started in 2022. Are they just a lifestyle business for the benefit of directors? Some shareholders think so; Simon Bragg, 16% shareholder, tried to organise a rebellion against director pay, and oust the current execs in 2020, but failed. However, he has also kept his stake and in fact increased it from 11% in 2020 to 16% as of Feb24.
There are two interesting major individual investors here. Simon Bragg, as mentioned above. Been invested for a while now, and in 2023 and 2024 increased his stake further, now at 16%. Recently, David Barry, a Value and sometimes Active investor in UK small caps, declared a 3% stake in Feb24.
Some of the board, despite being criticised by Simon for high pay, do have skin in the game. The chairman has over 5%, the CCO and and Group Commercial Director have over 2%. The new CEO himself has just under 1%. Decent amounts of shareholding for the directors.
I’ve done several different forecast scenarios looking out to FY25, FY26. But really can’t see the value here, from an EPS perspective. Even taking a £30m revenue run-rate (35% more than FY Dec23) and allowing for some gross margin improvement, but accounting for higher finance costs, I struggle to get anything more than 8-9p EPS in the rosy scenario. Which makes the current 175p share price too high. Tandem have done 30p+ EPS prior to COVID, but that was even higher revenues (£35m+), and at a much lower fixed cost base and financing costs than currently. There are no current plans on the table to cut fixed costs that management have been published. The only way to get back to like 30p EPS would be to substantially increase revenues, say to £35m+, which is 60% higher than FY23. IMO, it is not clear they can do that with their current strategy.
However, the NTAV is at over 300p. They have a huge property (office + warehouse) worth £14m+, currently only used to support a £22m revenue business; definitely not right-sized for Tandem. The sensible option would be to sell that, and lease appropriate premises for their size.
Maybe that is what the two “activist” individual investors (Simon and David) will end up pushing for. £14m property sold, with say £4m used to wipe out debt, and another £4m kept on the balance sheet, would allow 109p of cash to be distributed back to shareholders.
Verdict: Some attractive things here, but for me the SP is wholly dependent on realising some value from the £14m property, rather than potential profitability of the company in the next 2-3 years.