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Can you afford to ignore this small-cap growth stock after today’s news?

It’s not been a pleasant few months for many UK listed retailers. Fears over squeezed consumer spending and Brexit have led investors to move away from the sector. Clothing retailers, in particular, have been hit hard, with the share prices of even market darlings such as falling heavily.

With this in mind, I was drawn to today’s latest update from small-cap, omnichannel-based women’s fashion retailer Quiz (LSE: QUIZ).

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Strong online sales

Interestingly, it would appear that the positive trading momentum highlighted in January has continued.

Revenue rose by 30% to £116.4m in the 12 months to the end of March with sales in its UK stores and concessions increasing by 12% to £64.6m (thanks to a combination of “strong like-for-like performance” and new store openings).

The biggest jump in sales, however, was seen online. Thanks to “increased and effective marketing spend” and growth in the product range (e.g. bridalwear and the plus-size Curve range), revenues here rocketed 158% from just under £12m in the previous financial year to £30.6m in 2017/18. Having hitherto benefited from selling its wares on third party websites, the company now believes that the launch of own language international websites will help drive growth going forward.

Any negatives? There was mention of higher operating costs as a result of “earlier than anticipated” investment in “central functions“, including recruitment for its buying, merchandising and marketing teams. Money was also spent on expanding the company’s distribution centre and IT resources. Nothing too concerning though.

No, the main problem with Quiz still seems to be its rather steep valuation. Despite the aforementioned negative sentiment towards retailers, the company’s stock still traded at 24 times forecast earnings before today’s statement. Sure, that’s not as high as online giant ASOS but it’s still a fair bit higher than, say, Superdry or Ted Baker, both successful brands that have an established presence in overseas markets. I also still need to be convinced by CEO Tarak Ramzan’s assertion that the company has a “distinct USP“, or at least qualities that make it a safer bet than its peers. 

Quiz shouldn’t be ignored, in my opinion, but it’s still not a screaming buy.

Value trap

If you want an example of a stock that fully warrants the fall in its share price, look no further than Debenhams (LSE: DEB). Despite selling the aforementioned small-cap’s clothing, the department store group continues to underperform and remains one of the most shorted companies on the market.

Trading over recent months has been awful with price slashes and clearance sales failing to bring shoppers to its doors. With this in mind, February’s announcement that 320 jobs would be cut as part of a management shake-up wasn’t entirely unexpected. Arguably more surprising was March’s news that Mike Ashley-led Sports Direct had increased its holding in Debenhams to just under 30%, stating that it saw “huge value” in a strategic partnership between both companies. 

While a price-to-earnings (P/E) ratio of just 6 for the current financial year may attract bargain hunters, I remain convinced that the shares are cheap for a reason. Traders may profit from any hint of a reversal in fortunes and shorters closing their positions (interim results are out next Thursday) but with online competitors continuing to steal custom, I find it difficult to see how Debenham’s long-term prospects can be anything other than bleak. 

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Paul Summers 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.