Today I want to look at two fashion retail businesses in very different stages of development.
First up is online specialist MySale Group (LSE: MYSL). This small-cap operates flash sale websites and its ops include providing payment plans for customers. My other choice is FTSE 100 stalwart Next (LSE: NXT).
The MySale share price is down by 13% at the time of writing, following the publication of the firm’s results. I want to take a look at the numbers behind this news and then consider the outlook for Next.
The market hates surprises
Today’s final results were issued with the surprise news that MySale’s chief financial officer, Andrew Dingle, is leaving the firm at the end of October. Although there’s nothing specific here to indicate problems, sudden departures like this can be a worry. I suspect this is one reason why the shares are down today.
Moving on to the firm’s 2017/18 accounts, it’s clear to me that there is good news and bad news.
The good news is that profits and margins are up. Underlying pre-tax profit rose by 50% to A$4.9m, or about £2.7m (the company reports in Australian dollars). The group’s gross profit margins, a key measure for retailers, rose by 1% to 29.3%.
Bad news = opportunity?
In my view, the bad news is that sales growth remains very slow, at just 9%. Last year’s revenue of A$292m is only 30% higher than the A$224m figure reported in 2014. For a young online fashion firm, that’s not enough. Most rivals are doing much better.
However, this could be an opportunity for investors. MySale has invested heavily in its website and payment offering over the last couple of years. If the group can now increase its growth rate, the shares could perform very strongly from current levels.
As things stand, the stock trades on a 2019 forecast P/E of about 21. In my view that’s about right. I’d hold.
The Next big thing?
It’s easy to dismiss Next as a mature business whose best days are behind it. But I think this may be unwise. The high street firm remains one of the most profitable retailers in the UK, with a gross profit margin of 34% and an operating margin of about 18%.
Although the company’s large estate of high street stores could be a risk if town centre trading remains weak, Next is carefully managing its property portfolio so that both rental rates and average lease lengths are falling rapidly.
The company has already costed and published details of how it could gradually wind down its store business and shift to trading entirely online, even though it currently remains committed to sits stores.
A class act
We don’t know how the future will turn out. But we do know that Next is now generating about 45% of sales and 55% of its profits online.
We also know that online sales rose by 16.5% during the first half of the year — nearly double the rate seen at MySale.
The only weakness is that the profitability of the store estate is falling. This means that overall profits are expected to be fairly flat over the next year or two. For this reason I’d say that Next shares are probably fairly priced at the moment, on 12 times forecast earnings and with a 3% yield. I’d look to buy more if the price dips below £50 again.
