Profits could double in two years

My first penny stock is corporate currency exchange specialist Argentex Group (LSE: AGFX). This AIM-listed stock only came to market in 2019 and its performance has been a little inconsistent.

However, the latest accounts suggest a strong return to growth. Pre-tax profit rose by 22% to £3.3m during the six months to 30 September, while the currency value handled by Argentex rose by 67% to £8.3bn.

One downside to this business is that it’s a competitive sector, and it’s hard for outside investors to get much visibility on future profits.

However, Argentex has an operating margin of nearly 30% and is generating plenty of surplus cash. Analysts expect profits to double from £6m in 2021 to £12m in 2023.

Another attraction for me is that CEO Harry Adams owns 12% of the shares, so has plenty of skin in the game. I also think Argentex looks cheap on eight times forecast earnings, so this penny stock is on the buylist for my portfolio.

A fashion comeback?

Sales have doubled at fashion retailer Joules Group (LSE: JOUL) since the company listed on the London market in 2016. Unfortunately, the group’s profits slumped last year after the business was hit by cost increases relating to wages, warehousing and transport.

Joules’ share price has fallen by 75% over the last 12 months. The big risk is that Joules won’t be able to rebuild its profit margins, but this sell-off seems harsh to me.

Unlike some struggling retailers, Joules’ sales have kept on growing. Revenue for the half-year to 28 November rose 35% to £128m. This tells me that demand for Joules’ products is still strong.

I think CEO Nick Jones should be able to get costs under control. If I’m right, then profits could bounce back quickly. Broker forecasts put Joules on a forecast P/E of eight for 2022/23. I’d buy this turnaround stock for my portfolio at this level.

A penny stock for cake lovers

My final share is one I already own. Bread and cake producer Finsbury Food Group (LSE: FIF) makes a wide range of fresh products stocked by supermarkets in the UK and parts of Europe.

Finsbury’s share price has fallen by more than 30% since then end of 2021. That’s left the stock trading on a potential bargain rating of just six times forecast earnings.

Although management admits the company is facing pressure from rising food, energy and wage costs, Finsbury has a decent track record of managing these issues.

Finsbury’s sales rose 9% to a record £166.5m during the first half of this year. Although adjusted earnings fell 18% to 3.6p per share, City analysts expect full-year earnings to be unchanged from last year at 9.1p per share.

I think there’s scope for Finsbury shares to re-rate quite quickly, especially if price pressures ease. I’m continuing to hold this penny stock in my ISA as we enter the new tax year.

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Investor fears become reality

Since the last trading update, there has been growing concerns about the group’s profitability. Today, the veil of uncertainty was lifted to reveal investors’ worst fears. With the pandemic disrupting supply chains, and problems emerging in the group’s logistics operations, profits for the first six months of the 2022 fiscal year that spans May to May have dropped by 30%.

On the plus side, revenue over the nine weeks ending in January 2022 did climb by 31% compared to a year ago. And it’s actually ahead of pre-pandemic levels by around 19%. Yet this performance still remains below management’s expectations. To make matters worse, costs in its distribution centres doubled compared to a year ago due to UK labour shortages and were around £1.2m higher than anticipated.

Overall, I think it’s fair to say things aren’t going so great for Joules, and seeing its share price plummet as a consequence is hardly surprising. But is there a chance for a comeback?

Can the Joules share price recover?

In light of these problems, management has outlined its plan to tackle the situation. First off, the company is restructuring its wholesaling process. Minimum order value requirements are being introduced in the US, while any outstanding orders that are no longer profitable in the new environment are being cancelled.

Meanwhile, old inventory that’s moving too slowly is being liquidated. The marketing budget is being pulled back, and at the same time, the firm plans to increase the prices of its upcoming Spring/Summer range later this year.

The goal is to simplify operations and cut costs to improve profit margins. Whether this strategy will work, only time will tell. However, as of January, the company does have £11.5m of liquidity headroom at its disposal. And management believes this will be sufficient for the foreseeable future.

Assuming Joules is accurate in its assessment, I think it’s likely that the share price will be able to recover over the long term.

Time to buy?

While the sudden drop in Joules’ share price might be an overreaction by investors, it’s not unreasonable. Clearly, there are problems with operations. Whether this is only a short-term hiccup or a fundamental flaw in the company has yet to be revealed. Personally, I’m going to wait and see how management’s solution pans out before considering adding any shares to my portfolio.

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I’ve been digging into today’s update and crunching the numbers. I reckon this successful retail stock might be starting to look cheap at current levels. Should I add Joules shares to my Stocks and Shares ISA?

Sales rise by 35%

Like most of the UK retail market, Joules has suffered from supply chain problems over the last six months. Despite this, sales rose by 35% to £128m during the six months to 28 November.

The gains were driven by rising store sales as well as online growth. According to the company, in-store sales were only 3% lower than during the same period before the pandemic. This gives me confidence that Joules’ shop portfolio is still performing well, despite the general trend towards shopping online.

The only real disappointment is that supply chain problems have caused delays in online deliveries. Performance during November — including Black Friday — was below expectations.

Will Joules’ profits rise or fall this year?

A profit warning is never good news. But the picture at Joules seems to be better than I thought it might be.

According to the company, adjusted pre-tax profit for the current financial year is now expected to be between £9m and £12m.

This is a wide range, which suggests there’s still a lot of uncertainty. But even at the bottom end, £9m would still be 50% ahead of last year’s pre-tax profit of £6.1m.

Unfortunately, City analysts had even higher expectations for this year. Consensus forecasts before today were targeting a pre-tax profit of £15m this year. That seems unlikely now.

Should I buy this small-cap stock today?

Since its flotation in 2016, Joules’ annual sales have risen from £131m to around £200m. I’ve been impressed by the company’s performance and its ability to keep growing. The company’s country lifestyle vibe seems to resonate well with shoppers. Profit margins look quite respectable to me.

Another thing I like about this business is that founder Tom Joule still owns nearly 22% of the stock and sits on the board. I reckon this should ensure the company is run with shareholders in mind.

The main risk I can see after today’s profit warning is that the group’s recovery will take longer than expected. The combined impact of the pandemic and supply chain issues is hard to predict.

I think the worst is probably over, but I can’t be sure of this. In my experience, the first profit warning is often the start of a company’s problems, not the end of them.

I estimate that after today’s slump, Joules shares could be trading on around 17 times 2022 forecast earnings. At this level, I think the stock could be quite reasonably priced, if management can get growth back on track in 2022/23.

I’m not going to buy Joules today. But if the shares fall much lower, I may consider adding the stock to my portfolio.

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Today’s half-year results report leads with the statement: “Accelerating digital sales support delivery of profits ahead of expectations for the period.”

The harsh environment for retail shares

Meanwhile, the current harsh economic environment has caused many other retailers to fail. But I reckon Joules has the potential to survive the crisis and emerge as a sector winner in the years ahead. I think the business has a good chance of resuming its growth trajectory as the pandemic fades. So, I’d consider it now for my long-term Stocks and Shares ISA.

Today’s figures show that revenue for the six months to 29 November 2020 declined by just over 15% year-on-year. But the company earned £3.7m in profit before tax and exceptional items. And that outcome is ahead of the directors’ previous expectations.

E-commerce sales from the firm’s own websites grew by more than 45% in the period. And the company said “strong” online sales for the seven weeks to 3 January “more than offset” the effect of store closures through the Christmas trading period.  

Like big retailer Next and others, online business has been key to battling the effects of the pandemic. In many cases, customers have migrated to buying online if the stores have been closed. And the company is so focused on digital sales that in the report chief executive Nick Jones described the business model as “flexible and digital-led”.

One of the firm’s recent tactics was to establish the ‘Friends of Joules’ digital marketplace. And gross sales including that channel increased by almost 55% in the period “accelerating to 66% growth over the seven weeks to 3rd January 2021.” It seems the strength of the brand is keeping customers keen whatever the sales channel. And the company’s measure of active customers increased by nearly 160,000 over the six-month period to almost 1.6m.

Cash flow and growth potential

That trading success has been translating to decent cash inflows for the business. And the company reported a net cash position of almost £16m (ignoring lease liabilities), up from just over £2m year-on-year. That cash outcome is another figure coming in ahead of expectations.

Jones reckons Joules is “well-positioned” to grow as a leading lifestyle brand and digital marketplace. And I reckon there’s potential for the company to expand internationally as well as in the UK. The brand has already made “good progress” in the US and Germany, for example.

Meanwhile, with the share price near 149p, the forward-looking earnings multiple is near 20 for the trading year to May 2022. That looks like a full valuation to me reflecting the quality of the enterprise.

But one risk for potential shareholders now is that Joules may fail to make the double-digit percentage rebound in earnings that City analysts expect. If that happens, the valuation will look even higher and the share price could fall to compensate.

Nevertheless, I’m watching the retail share closely as a potential long-term hold with the aim of benefiting from growth in the years ahead.

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A whopping profit warning caused the share price to close at three-and-a-half-year lows last month. Sales were “significantly behind expectations” in the seven weeks to January 5, it said, falling 4.5% annually. This was a shocking result considering the 11.7% corresponding rise a year earlier. And it caused the AIM firm to advise that underlying profit for the fiscal year to May 2020 will be “significantly below market expectations.”

Too risky right now?

The retailer has erased some of this share price weakness more recently, it has to be said. Stock availability issues affected online sales and prompted that profits downgrade of mid-January. But in a subsequent half-year release, Joules said that the cause of the problem had been identified, prompting investors to pile back into the stock.

Market-makers were assured by news that the retailer has “taken steps to rebalance the allocation of stocks between channels for spring/summer 2020.”  They liked news that it is “ strengthening… underlying processes” too. A glance at City forecasts would suggest that its recent problems are just a flash in the pan as well. Joules is predicted to recover from a rare profits drop of 17% in financial 2020 with a 10% rise the following year.

Broader retail conditions lead me to believe that such a bold estimate could fall flat, though. A recent survey from PwC suggested that fashion sales will remain in the doldrums in 2020. In it, 33% of respondents said they will buy less this year, 24% commenting that they will buy clothes less often.

The threat of persistent Brexit uncertainty and the rising awareness surrounding sustainability casts a pall over the whole retail sector. And Joules, which trades on a forward P/E ratio of 16.5 times, is just too expensive in light of this outlook. I’d avoid it like the plague right now.

Safe and sound

I’m confident that Safestore Holdings (LSE: SAFE) will impress the market with first-quarter financials on February 13. And this makes it a top buy today. Broader consumer confidence might still be in the doldrums, but this isn’t damaging trade at the self-storage operator.

It’s possible, in fact, that activity could have picked up in recent weeks. Demand for Safestore’s lock-ups from both private individuals and businesses may have jumped following December’s general election and the subsequent improvement in near-term Brexit clarity. Not that the company needs one-off events like this to record solid revenues growth (sales rose a healthy 5.5% in the fiscal year ending October 2019).

Through aggressive expansion, Safestore is exploiting the country’s shortage of self-storage facilities to its fullest. And it’s a programme that City analysts expect to accelerate earnings growth from the mid-single-digit percentage rises of recent years to a 14% increase in fiscal 2020.

A forward P/E ratio of 26.4 times is expensive on paper, sure. But I reckon the FTSE 250 firm’s exciting growth plans and immense structural opportunities merit a premium rating.

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According to management, stock availability issues caused retail sales to fall by 4.5% during the seven weeks to 5 January. This compares with growth of 11.7% during the same period last year.

Joules is not the only retailer to issue a disappointing update this week. However, the company says that its problems were caused by a one-off supply problem with its online sales, not by weaker demand.

If demand continues to remain strong, then it’s possible that Joules could be cheap after today’s drop. In this article I’m going to take a closer look at Joules to see whether the stock might be worth buying.

I’ll also take a look at high street stalwart Marks and Spencer Group (LSE: MKS), whose share price fell yesterday after a disappointing update.

“Demand remains strong”

According to CEO Nick Jones, “demand for the Joules brand and its unique products remains strong”. Mr Jones says that website traffic rose by 8% over the festive period and customer numbers rose. The only problem was that supply issues meant the company couldn’t satisfy online demand.

The company says these one-off issues have been fixed and that it’s taking steps to beef up its logistics operations here in the UK and in the US — overseas sales now generate about 17% of revenue.

A cheap fashion buy?

Today’s update warns that profits for the year ending 26 May are now expected to be significantly below expectations. Based on broker forecasts I can see, I estimate that underlying earnings might now drop to around 13p per share, down from 14.1p last year.

On this basis, Joules stock now trades on about 13.5 times forecast earnings. If the business can return to growth next year, this could be a bargain. But it’s not without risk — problems like this often mark the start of a period of poor performance. I’d consider taking a small position in Joules, but I wouldn’t bet the farm on it.

Is there any hope for M&S?

Marks and Spencer seems to have been in turnaround mode for as long as I can remember. And it’s usually the same story. Food sales are up, clothing and home sales are down.

That’s what happened during the third quarter, which ended on 28 December. Same-store food sales rose by 1.4%, while clothing and home sales fell by 1.7%, on a comparable basis.

These numbers didn’t surprise me. But what did shock me a little was that the group’s online sales of clothing and home items only rose by 1.5%.

Most big retailers are reporting strong online revenue growth, even as store sales fall. For example, Next reported a 15.3% increase in online sales during the final part of last year.

If M&S can’t attract online shoppers, then I think it has a serious problem.

I remain bullish about the outlook for the food division’s move online with Ocado. But I’m starting to think the group’s clothing business may be beyond help. Splitting the business in two is starting to look attractive to me, but could be very difficult and expensive.

I’ll be staying away from M&S stock until things become clearer.

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The growing online fashion market is estimated to be worth more than £220bn. With time, it is likely that ASOS will be well placed to capture more of this in its international markets.

However, hope doesn’t lift the share price and its second profit warning in seven months, screams ‘avoid’, I think. The update reduced the company’s pre-tax profit forecast to £30m-£35m, massively down from a previous estimate of £55m. An immediate sell-off followed this news, dropping the share price by 23%.

ASOS is nearing the end of a planned infrastructure and technology overhaul of its US and European warehouses. Unfortunately, this has not gone as smoothly as hoped and various disruptions have drawn out the process, affecting inventory levels and its ability to meet demand.

But UK sales have grown 16%, which is impressive with all the Brexit uncertainty affecting retailers. So can it recover to its previous highs? I think it’s possible, but it’s unlikely to be soon.

Growing product range

Joules (LSE:JOUL) is very different and its appeal seems resilient even with Brexit-induced consumer caution. Its brand style very much smacks of the middle-class country lifestyle, but this appeals to a wider sector of society and is popular with urbanites/suburbanites too. The bright colours, good quality fabrics and simple, but not boring, designs make these clothes perfect for children and adults alike. It is famous for its wellies and now also sells pet beds, kitchen textiles, bedding, stationery and radios.

The business was founded by Tom Joule 30 years ago when he began selling polo shirts and wellies at agricultural shows. He then progressed to mail order, and the company floated on the London stock exchange in 2016. It continues the mail-order business, both via catalogue and online, and has 125 shops in the UK and is growing abroad with international sales now contributing 16% to the business.

Positive year-end results

Yesterday, the company posted its full-year results to the end of May, with an impressive 17.2% rise in sales to £218m. Pre-tax profits also rose by nearly 15% to £12.9m. It made £1.8m in licensing fees, which is a 147% increase on the year before and free cash flow increased to £8.7m from £0.1m.

The share price took a dip after the news, possibly because of a drop in the gross margin from 55.7% the year before to 54.8%. Also, a management change is afoot with chief executive Colin Porter, stepping down in September to take up the role of Chairman at Moss Bros. Former Asda director Nick Jones will replace him.

Joules has a 50% debt ratio, which is high, but down 10% from last year. It also has a dividend, but with a minuscule 0.8% yield, it is barely worth mentioning. The price-to-earnings ratio (P/E) is 19, down from 29 at the end of May 2018. This is not too far off the average P/E of 15. 

Joules is circumnavigating the choppy seas of Brexit, as is its high street contemporary Next, so it seems fortuitous that these two have joined to create a formalwear range, including suits, shirts and smart blazers for men.

With Joules’ resilience to tough trading conditions and wide product offering continuing to please consumers, I consider Joules a buy.

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Today’s pre-close trading update for the year to 26 May contained more good news for those already holding the casual-clothing-to-wellies-seller.

At £218m, revenue was 17.2% higher than the previous year with the “strong momentum” seen in the first six months of the financial year and over Christmas continuing into the second half  — something the small-cap partly attributed to overseas growth.

Reassuringly, the 30 year-old company’s online operations “performed particularly well,” so much so that they now contribute 50% of the £159.1m revenue from retail. 

Wholesale revenues were 2.9% higher with strong growth reported in the US and Germany. In fact, approximately half of sales in this part of the business now come from overseas.

All this (and combined with cost savings) has led management to predict that underlying pre-tax profit will be “at the top end of the range” of analyst forecasts. So, somewhere near £15.3m. 

Stock in Joules was trading at 19 times earnings before markets opened. That’s clearly not as cheap as retail peers such as Next which also boasts a better yield (2.9% vs Joules’s 1%). 

Nevertheless, Joules does have qualities that investors tend to be willing to pay out for such as high returns on capital and plenty of cash on the balance sheet.

The potential for more growth overseas also goes some way to justifying the valuation, at least in my view. At this point in time, the company’s international business contributes ‘just’ 16% of total revenue — a proportion that I think will only increase over time, so long as management remain disciplined in their approach.  

Joules continues to look like a great business. Since I’ve already got a small holding in another clothing retailer, however, I’m prepared to sit on the sidelines for now. Should a general market wobble come along, I could be sorely tempted. 

Growth and income

Another small-cap impressing the market today was freight manager Xpediator (LSE: XPD).  According to the market minnow, demand for its services “remains strong.” In addition to trading in line with market expectations, it commented on seeing a lot of “bolt-on opportunities” which could generate value for the company, if acquired.

Aside from this, a number of management changes were announced, including the promotion of CFO Stuart Howard to CEO from September. Stephen Blyth — Xpediator’s current CEO — will move to the position of executive chairman and focus on developing the company’s strategy and merger and acquisition opportunities. My only slight concern here is that Howard will combine his CFO and CEO roles if a replacement for the former isn’t found in time.  

Right now, you can pick up Xpediator’s stock for just 9 times earnings. For a company that’s tripled in size in just two years and shows no signs of slowing down, that looks good value to me. Its asset-light business strategy (it doesn’t own a fleet of trucks and therefore has low overheads) also appeals, as does the secure-looking 4% dividend yield.

Still relatively unknown among retail investors, I continue to think that Xpediator could be worth buying as part of a diversified portfolio.

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A class act

FTSE 100 firm Next (LSE: NXT) appears to be navigating the shift online with supreme skill and January’s trading update showed exactly how this is working.

Retail sales fell by 7% during the year to 29 December, but online sales rose by 14.9% over the same period. Overall, the group’s full-price sales rose by 2.6% during the year.

What these figures tell me is that Next’s customers are still buying. They’re simply shifting their purchases online. To make allowance for lower store sales, Next is closing physical units if it can’t negotiate lower rents on lease renewals.

A hidden attraction

This business also has another attraction that’s less obvious. A significant number of Next customers buy on credit. According to the firm’s interim results, credit customers owe the group about £1.1bn. Management expect this to generate a net profit of about £123m for the current year. That’s about 20% of this year’s forecast profits.

This finance income is one of the reasons why Next is one of the most profitable businesses in the UK retail sector, with an operating margin of about 19%.

Shares in this quality retailer are currently on sale with a 2019 forecast price/earnings ratio of 11 and a dividend yield of 3.4%. Although growth is expected to be limited over the next year, I think this is too cheap. I’d be a long-term buyer while the shares are under £50.

An upstart rival with strong growth

Next isn’t the only fashion retailer that’s profiting in stores and online. A smaller but more upmarket alternative is Joules (LSE: JOUL), which listed on the AIM market in 2016 and has a market-cap of £227m.

Half-year figures published on Wednesday show that sales rose by 17.6% to £113.1m during the six months to 25 November. Underlying pre-tax profit rose by 14.7% to £10.7m. Joules is also expanding overseas with international revenue rising 64.2% during the half year and now accounts for more than 15% of total sales.

One problem

The only problem I have with these figures is that this company doesn’t separate out online and retail (store) sales in its published accounts. This is unusual, as it makes it impossible for investors to understand how the group’s store network is performing.

We are told that internet sales now account for 46.5% of all retail sales, up from 35.8% at the same point last year. Despite this, the number of stores and concessions operated by the company has risen from 118 to 157 over the same period. What kind of contribution are these outlets making to sales and profit? We simply don’t know.

Should you buy Joules?

The firm says its stores are increasingly important for click & collect and online returns, as well as sales. I can see the strength of this argument, but I’d still like to see the cold hard numbers.

Although Joules is undoubtedly profitable and growing, I feel the shares are fully priced on a 2018/19 forecast P/E of 19. I won’t be investing just yet.

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Priced at 255p a pop back at the beginning of 2018, the shares fell 90% to end the year a little under 26p following a couple of profit warnings. 

Based on today’s trading update for the 18 weeks to 29 December, it looks like 2019 could be just as tough for the Rochdale-based firm and its investors. 

Revenue up, but…

At first sight, it doesn’t seem so bad with the company growing revenue “across all channels and all major product categories“. Total revenue rose 14% to a little over £102m. Online sales jumped 28% to £36m and have now contributed a third of total revenue for the year-to-date. Revenue from retail stores was also up 5% to £63.7m.

So, why were the shares down 13% in early trading? Much of this is likely due to the news that gross margin for the full year will now be “lower than previously anticipated” as a result of Footasylum needing to offer more promotions to entice shoppers to buy from the company rather than from rival retailers. This pretty much negates all of the previous positive talk about rising revenues. 

Another reason is the (unsurprisingly) downbeat outlook. According to the company, trading conditions experienced over the first half of its financial year “have continued throughout the Christmas trading period“, leading it to state that its short-term future is “undeniably challenging“. As a result of its desire to focus on cash and working capital,  a cost reduction plan was also announced which may generate some exceptional costs in the current financial year. This means that adjusted earnings will now be “towards the lower end” of analyst forecasts.

I’ll admit to becoming rather interested in Footasylum when it began falling early last year. However, with consumer confidence now likely to remain weak for some time, especially with Brexit just around the corner (at least officially), I’ll continue to steer well clear. At a time when other retailers are closing stores in order to preserve cash, its decision to open five new sites (and upsize three others) in time for Christmas looks increasingly misjudged. There could be further pain ahead for those still holding.

Price jump

Also reporting today was lifestyle clothing and accessories business Joules Group (LSE: JOUL). 

Although its share price didn’t suffer to quite the same extent as Footasylum’s, many investors still chose to dispose of their holdings in the small-cap over 2018. From a peak of 387p back in June, the shares had fallen 37% in value before this morning’s trading update was released to the market.

The reaction to the latter, however, couldn’t be more different with the stock jumping 5% in early trading. 

Retail sales increased 11.7% over the seven weeks to 6 January with growth seen “across all the brand’s product categories” and almost half of these sales achieved online. Crucially, management continues to believe that pre-tax profit for the full year will be in line with expectations. With many retail stocks issuing warnings, this is pretty encouraging stuff.

On 18 times earnings before this morning, Joules isn’t cheap to buy, but it’s surely a more palatable option than Footasylum. Interim numbers for the six months to 25 November will be released in just over two weeks. 

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