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Is this 8% yielder a top hidden value stock or red-hot falling knife to avoid?

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As retail stocks plummet left, right and centre, investors would be forgiven for writing off the vast majority of clothing and home goods retailers as not worth even considering investing in. On the other hand, hardy contrarians may find this sell-off has offered up a handful of intriguing deep value options.

One that’s on my radar is menswear retailer Moss Bros (LSE: MOSB). The high street staple’s stock plunged over 30% in value earlier this month when its full-year 2019 trading update led off by saying “the board now anticipates that the group will deliver profit at a level materially lower than current market expectations.”  

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But full-year 2018 results released this morning show that this poor performance set to begin the year could be a temporary blip rather than the beginning of the end for the firm. After all, in the year to January 27, revenue rose a respectable 3% to £131.8m while EBITDA fell marginally from £13.6m to £13.3m.

And this performance wasn’t due to an unsustainable store roll policy as its estate grew by only one location to 128. Rather, like-for-like sales grew by 1.6% in addition to online sales increasing by a whopping 13.5%. These figures are important as they show that Moss Bros collections are still resonating with shoppers enough that positive sales momentum is being seen even as revenue from hire sales continues to fall due to shifting consumer habits.

Battening down the hatches 

Looking forward, the company is also in a good position to ride out what management is telling us will be a terrible 2018 that has already seen like-for-like sales fall 6.7% in the first eight weeks of the current year. It had a net cash position of £17.5m at year-end and management is taking a sensible approach to maintaining this healthy balance sheet by trimming its full-year dividend from 5.89p to 4p year-on-year.

However, at its current share price, this still represents an 8.5% yield. And while any cut to dividend payouts is tough to take as an investor, especially when analysts were expecting steady increases this year, it’s good to see a management team being proactive.

In this same vein, the CEO said this morning that the firm will be seeking improved lease terms with building owners to take into account the recent drop in footfall at its stores. Even before any possible rent reductions, the estate was in good shape as all stores have been recently refurbished and the average lease length was 55 months, which gives management significant flexibility in adapting to the current situation.

Furthermore, some of the current pain appears to be largely self-inflicted as a reshuffle of its supplier base due to the weak pound led to low stock levels for the first months of the year that prevented it from keeping up with consumer demand. This was a painful misstep by management but is a fixable one as customers are still reacting positively to the group’s clothes.

That said, while I like the Moss Bros offering, plus the changes being made to adapt to shifting consumer shopping habits and its healthy balance sheet, I’ll be watching closely for a clear sign that trading is rebounding before I’d consider buying its shares.

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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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