Fool's Eye View

[ October 5, 2000 ]

Growth Deserts Oasis

By David Kuo (TMFDragon)

Carburton Street, London -- Ah Oasis (LSE: OAS)! The ladies' out-fitters that rose like the phoenix from the receivers' ashes of Pinecord Ltd. But rather than resembling the fabled bird of fantasy, this company is beginning to take on the attributes of a headless chicken. A company bereft of ideas and resorting to the only tool left for the unimaginative retailer…"price cutting".

Half-year numbers

This morning, Oasis disclosed interim results for the 26 weeks to July. But before we delve into the figures, let's take a quick tour around today's statement. The company proudly trotted out a couple of quotes from leading fashion magazines, which were supposed to be a testament of its premier stature in the marketplace. The first was attributed to Company Magazine/She's Gotta Have It who said that consumers voted Oasis "the best place to spend £250". The second came from Cosmopolitan, whose readers voted Oasis "Favourite High Street Retailer " of the year.

Now if Oasis is supposed to be a shining example of the best in British retailing, then heaven help the rest of the UK's fashion outlets. But don't let me cloud your judgment. I'll let the figures speak for themselves.

Turnover rose 6% to £63.2m compared with the same period last year. Like-for-like sales actually declined 2% but if you thought that was bad and that things couldn't get worst then think again. The company said that for the first nine weeks of the second half, like-for-like sales at Oasis were down 4% but group sales edged ahead 2%. But sales aren't everything. What about the profit? Operating profit at the group fell 45% to just £2.5m. The company now has an operating margin of just 3.9%.

So what does all this mean?

Hmm….rising sales and falling profits can mean only two things. Either operating costs are rising ahead of sales or the company is frantically reducing prices to grab market share. Operating costs at Oasis have in fact increased 8% from £26.2m to £28.3m. Gross profit margins have fallen from 52% to 48% causing gross profits to remain static at £30.8m.

Ouch! The figures do not bode well for Oasis. The company's gross profit is getting perilously close to the levels where operating expenses could soon overtake it. In other words, the company will be unable to generate sufficient gross profit from its sales to cover operating expenses. The margin of comfort is getting exceedingly slender. A further reduction in gross margins of just 3% could tip the scales sufficiently to take this company into the red.

The current ratio, which is a measure of the liquidity of the company has dropped from 1.6 to 1.3. The liquidity is the ability for a company to pay its creditors. This fall in liquidity gives some reason for concern especially when cash and investments have declined by £1.1m while at the same time bank loans and overdrafts have risen by £4.5m.

Now What?

Retailing is one of the most competitive businesses around. The market is polarised between the cheap and cheerful at one end and the high-end branded goods at the other. The middle market is littered with far too many "me-too" types of company who believe somewhat misguidedly that they have an identifiable brand. Oasis unfortunately falls into this category.

Where next?
• Why not have your say over on the Oasis discussion board?
• Oasis website