Moss Bros is packed with cash but stalling. Austin Reed is soaring. Will either suit the smarter investor?
"Attendances in June were impacted by the World Cup" Raymond Mould, Arena Leisure
(LSE: ARE)
"July was World Cup month, it was ghastly" Ralph Bernard, GCap Media
(LSE: GCAP)
"I am loathe to mention the World Cup" Alan Giles, HMV
(LSE: HMV)
Oh, go on Alan, you know you want to. "But our key customers in the age 15 to 35 male demographic have been rather distracted."
Can there be a retailer whose pitch hasn't been slanted by the World Cup? While JJB Sports
(LSE: JJB)
, KesaElectricals
(LSE: KESA)
and Majestic Wine
(LSE: MJW)
found the net, Moss Bros
(LSE: MOSB)
shares joined the back passers with a 15% dive on August's trading statement as they finished the first half down 1% (on like-for-like sales).
An ashen-faced Chief Exec lashed out at the "World Cup and the unusual weather" which had cost him a million quid by nailing his goggle eyed customers to their sofas instead of smartening up their attire with suits and top hats. Or perhaps they sneaked off to Austin Reed
(LSE: ARD)
to drive up underlying sales 8% in the same period, making Moss Bros' look excuse rather lame.
Results just in
Moss Bros' interim results today revealed pre-tax profit slashed 53% to £0.8m despite total sales up 1.4% at £63.3m. Basic earnings per share (EPS) were 0.61p (2005: 1.29p). A first half dividend of 0.5p is maintained.
The sharp drop in profit is due to a jump of 3.2% (2005: 1.8%) in operating costs. The half time application of the magic sponge proved ineffective with the most recent ten weeks' like-for-likes flat, disappointing both management and the market. The shares were reduced 1.75p to 71p in morning trading. The continuing lacklustre trading confirms that the summer slump was an own goal, forcing the Chief Exec to admit that "the performance of Moss has not been satisfactory."
Bright spots are net cash of £10.7m and scope to enlarge the core Moss chain to 200 units from the current 118.
So, is Austin Reed the smarter buy in this sector? Its gross margin of 59% is better than its rival's 54%. Its forecast earnings growth is 345% (though from a low base) vs 1%. Austin Reed's recovery is already in the price with a high prospective P/E (at 135p) of 22.7 while Moss Bros' is 15.6.
Moss Bros' valuation ace is its large cash pile which will be about £18m at the year end due to seasonal inflows. Austin Reed looks like it will have about £4m at the same point. Adjusting valuations for net cash we get prospective EV/operating profit ratios of 16 for Austin Reed and 8.6 for Moss Bros. 8.6 still isn't cheap for a struggling retailer -- I'd be looking for 6 or less before I got my wallet out. Earnings forecasts are likely to be cut, making the ratios even worse. Value investors should stay clear for now.
