We all know it’s tough out there on the high street. Consumers are strapped for cash, and the recent bad weather has just made things worse. Retail sales as a whole grew by just 0.1% in June compared to last year.
Most of the retailers who have updated on trade recently have confirmed the misery. But one has bucked the trend: Sports Direct (SPD).
The company’s strategy of selling lots of products at value prices saw sales jump 13% in the last year, with underlying earnings up 11.4%. The founder Mike Ashley and his staff stand to be nicely rewarded for their efforts, but shareholders will have to keep waiting for a dividend.
With the share price up nearly 20% over the last year, those who bought at lower prices are probably quite content with this. However, the shares have yet to rise above their 2007 flotation price of 300p, meaning that long-term owners still have a bit to grumble about.
So what they’ll think about plans to further enrich Ashley could be interesting.
The company is proposing that Ashley should get eight million shares in 2018 if EBITDA (profit before depreciation) meets annual targets and exceeds £340m (currently £235m) in 2015. Net debt has to be less than 1.5 times EBITDA.
You might see no reason to complain if these targets are met. But how the company goes about it is critical. For example, the target could be met simply by going out buying other companies (JJB Sports, for instance), thus boosting profits and cutting costs.
Shareholders should probably insist on more stringent performance criteria – such as a decent return on investment – so that the management doesn’t just buy profits. In the meantime, reinstating the dividend would help impose further discipline on management.
Tough times for Mothercare, but Halfords might just be a turnaround play
Elsewhere, Mothercare (MTC) continues to struggle in the UK. Shares rallied on relief that there was no profit warning, and the international business is still doing well, with sales up 11% in the first quarter. But UK sales fell by 6.7%, suggesting that trading remains very tough. We struggle to see Mothercare as a good investment given the challenges it continues to face over here.
Meanwhile, CEO of Halfords (HFD), David Wild, has paid the price for the company’s poor trading and has been fired. The stock market welcomed the news, sending the shares up nearly 10% in early trading. While underlying sales at its Autocentres grew by 10% in the first quarter, sales at its retail business continued to decline, with bicycle sales down by nearly 10%.
Halfords’ shareholders have had a miserable time over the last few years. The company is trying to keep them happy by promising to maintain the half-year dividend at 8p per share. That delivers a yield of 3.7% on the current 214p share price.
But the outlook for the full-year dividend looks more uncertain. Analysts currently expect Halfords to make 29p in earnings per share (EPS) for the full year, which suggest that last year’s payout of 21.9p might be too thinly covered and needs to be cut.
However, with the shares trading on a forward price/earnings (pe) ratio of just 7.4 times, they could be an interesting potential turnaround play, particularly if a new chief executive can reinvigorate the business.
Worries about Britvic – but put Kingfisher on your watchlist
2012 is turning out to be a tough year for Britvic (BVIC). It recently had to recall its Fruit Shoot brand due to a faulty cap design on the bottles. This will cost it up to £25m in lost profits this year. Worse still, the dreadful summer weather has hit demand for its soft drinks. Third-quarter UK sales fell by 6.9%, with Irish sales down 11%. France was brighter, with sales up by just over 4% and Fruit Shoot seems to be selling nicely in America.
What’s worrying is the tone of the statement. It seems as if Britvic’s finances may be becoming quite stretched, given the emphasis on cost cutting and cash generation. Investment has also been scaled back. Shareholders will be hoping that its dividend – the yield is currently 5.6% – will not come under threat.
The weather has also affected DIY sales at Kingfisher (KGF). Sales are still growing at B&Q, but profit margins have fallen as prices had to be cut to clear stocks of its garden products. Screwfix continues to be popular with tradesmen but sales growth is slowing down.
Overall, we continue to like Kingfisher’s business here at MoneyWeek. It has a good business model and should become more profitable with a number of self-help projects. It also has very strong finances. However, we’d like to see the shares a bit cheaper than 270p before buying though. One to keep on your watchlist.