Can this small cap be a high-street winner?
These days, you can barely read about a high-street chain without the word 'retailer' being prefixed by 'struggling'. Chocolate-maker Thorntons (LSE: THT), which announced its half-year results on Wednesday, could be described as a struggling retailer par excellence.
Chocolate heaven since 1911
As the numbers in the table below show, turnover has held up reasonably well over the past few years. Indeed, the 100-year old chocolatier told us it had made and sold a record quantity of chocolate during the first half.
A glance at the trend in operating margin and exceptional losses since 2008 tells us where the real problem lies.
| | 2008 | 2009 | 2010 | 2011 |
|---|
| Turnover (£m) | 208 | 215 | 215 | 218 |
| Operating profit (£m) | 10.3 | 9.7 | 7.6 | 0.9 |
| Operating margin (%) | 5.0 | 4.5 | 3.5 | 0.4 |
| Exceptional gain/(loss) (£m) | 0.1 | (0.3) | (0.9) | (3.5) |
| Shareholders funds (£m) | 35 | 29 | 26 | 19 |
| No. of employees | 4,561 | 4,479 | 4,377 | 4,205 |
Source: http://investors.thorntons.co.uk/financial-summary
Thornton's margins have been hit by high raw material costs, and by discounting and promotional costs in the battle to woo value-hunting, austerity-stricken consumers.
Furthermore, with falling profits on the high street, projected cash flows for many stores have become insufficient to cover property costs up to the lease expiry date, resulting in exceptional impairment and onerous lease charges -- a further £2.4m so far this year.
Just to add to the margin gloom, the contraction in retail has increased the relative weighting of the group's commercial channel, where sales are made at wholesale prices and consequently reduce the overall margin.
Chocs away
Strategic reviews have become almost mandatory for high-street chains in the prevailing climate. Thorntons has done one, and it's nothing special -- a familiar identikit of themes for anyone who follows the retail sector:
- We have a well-loved brand and we're going to revitalise it.
- We're going to downsize our high-street estate (in Thornton's case, to 180-200 stores from the current 355, within three years).
- We're going to re-format our stores (an encouraging performance of a pilot store in a new format is a retail favourite -- and Thorntons unveiled one in its latest results).
- We're going to invest in the growth areas of our business (the commercial channel in Thorntons' case).
- We're going to develop, or refresh, our online offering (Thorntons is preparing to launch a new website after Easter).
Thorntons, like other struggling retailers, is "confident [it] has the expertise and the resources to successfully complete this transformation and restore profitability".
Pot luck
You'll find plenty of beaten-down retailers currently on ridiculously low price-to-sales ratios. Thorntons, whose shares have fallen from a pre-crunch 200p to under 20p, is no exception. The price-to-sales ratio (both historic and forecast) is just 0.06 at the current price of 19p.
What that means, of course, is that if management successfully restores profitability, Thorntons' shares could easily multibag from this level. Indeed, they've already doubled from their January low of 9.5p, and that's with a scrapped interim dividend and no concrete evidence of recovery.
Some struggling retailers will certainly pull the return-to-profitability trick off; some won't. The trouble is, they're all in more or less the same boat and are doing more or less the same things to try to achieve their goal.
For me, it's pretty much pot luck which troubled retail shares will ultimately win big, and which will fall by the wayside. If anyone knows of a UK high-street exchange-traded fund, let me know!
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