The credit crunch isn't just hitting banks, one sofa retailer is in serious trouble.
Writing about anything other than banks at the moment seems almost irrelevant, as the success of failure of various rescue packages will affect the fortunes of most other businesses. Not least of these are companies related to home improvements.
When I wrote about these a few months ago, I was very wary of the sector. By far the worst performer of the three shares I discussed has been sofa retailer Land of Leather (LSE: LAN), which at the time had just completed a successful fundraising of £15m.
Since then the shares have fallen more than 80% to 9p, and the company is now worth around £3m -- at its peak in January 2007, it was valued at nearly £200m. Results announced this morning show like-for-like sales down 28.9%, and basic earnings per share (EPS) falling 93%. On the plus side, the company is at least not making a loss, and has no debts to maintain.
But as with many businesses currently, it's all about cashflow. Retailers have fixed costs to pay, particularly rent and salaries. Not counting the funds raised in July, Land of Leather had a net cash outflow for the year of £23.9m, compared to a net cash inflow of £14.4m the previous year, although much of this outflow relates to one-off or non-recurring items. It's good to hear that these are non-recurring, as available cash in the bank is a comparatively small £10.6m.
The company has announced a range of measures to conserve cash, including scrapping the dividend, suspending store upgrades and openings, reducing stock levels and advertising, and cutting staff numbers. Directors will also defer part of their salaries.
Of course the big question is whether this will be enough, and given the number of variables and unknowns, I can't really make an estimate of this year's cashflow, or how long the cash will last. I think consumers have had quite a shock, so even if recapitalisation of the banks does have the effect of making more credit available, I'd be doubtful that shell-shocked consumers would still choose to buy sofas.
Perhaps the best conclusion for all concerned would be a management buyout. The management are clearly committed to the business, having invested £2.75m in June's placing at 50p, and with some topping up subsequently at lower prices, although admittedly the world has changed in the meantime. If they could scrape together the a similar amount of capital again they could buy the business outright.
But for the private investor, there are just too many unknowns (and unknowables) for my liking, and as a micro cap the spread between the buying and selling prices is quite wide. Without more detailed knowledge on trading and cash-flow, I can't see how any investment in Land of Leather would be more than a random punt.
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