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.

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A turning point 

Today the online mainly-fashion retailer reported that for the six months to 31 December (first half of fiscal 2018) underlying profit before tax increased 266% to A$2.3m on revenue growth of 11% to A$152m year-on-year. 

These figures put MySale on track to potentially beat City earnings forecasts for the year. Reported underlying earnings per share for the six months to the end of December were 2 cents and City analysts are currently forecasting earnings of 2.4 cents for the full-year (fiscal H1 tends to be the group’s most profitable period). 

Still, while these numbers look impressive, compared to the likes of Asos, they’re pretty downbeat. Indeed, total retail sales in the four months to December 31 increased 30% for Asos, including 23% year-on-year sales growth in what the company described as a “challenging” UK market. MySale does not break out its UK revenue directly like it does with sales in Southeast Asia, and Australia and New Zealand. UK sales are part of the group’s ‘Rest of World’ category (just under 6% of total sales) and here sales expanded 23% year-on-year for the six months to the end of December, in line with Asos’s growth. 

Picking up speed

MySale might not be growing as fast as its larger UK-focused peer, but the company is heading in the right direction. 

Sales growth only really started to take off in 2015 when management refocused the business on “its core aims of providing exceptional value in branded products to customers.” Since then, margins have widened and losses have been substantially reduced. The group continues to add more products to its range as well as investing in technology to help consumers and suppliers alike. And as revenue continues to grow at a double-digit rate, City analysts expect the company’s earnings to jump by more than 50% for fiscal 2019, although these figures are based on current estimates for 2018, which could, looking at today’s numbers, be revised higher over the coming months. 

Nevertheless, based on current City numbers, shares in the company look cheaper than those of Asos, trading at a forward P/E of 60, compared to Asos’s 65. What’s more, Asos’s earnings are only expected to grow by 25% for fiscal 2018 and 2019 implying that Mysale also looks cheaper on a PEG basis as well. 

Asos has invested millions building out its infrastructure to deal with extra capacity. Big new warehouse operations in Germany and the US, designed to handle £4bn worth of sales, double that of today, will only pay off if the company’s extraordinary growth streak continues. Meanwhile, MySale is less invested and I’m more excited by its long term potential as the firm expands across Asia while mature markets, such as the UK and US, become more competitive and Asos loses its edge. 

Put simply, MySale’s growth is only just getting started and the company’s offering already seems to be winning over customers with an industry-leading return rate of just 5%.

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Trading well, but…

The firm is an international online retailer of fashion, apparel, health, beauty and homewares, running flash sales and retail websites in Australia, New Zealand, South East Asia and the UK. A decent outcome shows in the figures for the year with revenue 6% higher than a year ago and underlying earnings per share shooting up 500% to 2.5p.

However, underlying profit before tax came in at just £3.3m, which is a little over 1.2% of the revenue figure for the year. Compare that BooHoo.Com’s net margin running around 10% and ASOS’s at a little over 4%, and it seems clear that MySale has work to do before the level of profitability will be comfortable.

I could be patient on margins if the revenue suggested that MySale is an emerging fast-growing business worthy of its high valuation. But 6% growth in revenue strikes me as pedestrian. ASOS, for example, expects forward revenue to surge by 25% and Boohoo by 33%.Both are growth figures that suggest the potential for rapid forward escalation in earnings.

Everything to prove

MySale’s forward price-to-earnings (P/E) ratio runs at a whopping 76 or so for the year to June 2018, and I think that’s too high for a firm that still has everything to prove, so I’d ditch the stock in favour of the turnaround story at Provident Financial (LSE: PFG).

Provident supplies non-standard personal credit products and its shares plunged by more than 76% this year to match a profit collapse brought on by an ill-judged change to the operating model. A new home credit model involving employed full-time customer experience managers kicked in during July to replace previously self-employed agents. The transition didn’t work out as smoothly as planned and in August the firm told us that successful revenue collections were running at 57% versus 90% during 2016. On top of that, sales were around £9m per week lower than the comparative weeks in 2016. The director’s forward guidance is for a pre-exceptional loss for 2017 of between £80m and £120m – oh dear! 

Turnaround potential

Naturally, the company is engaged in a “thorough and rapid review” of its operations with the aim of turning the business around. City analysts following the firm think the directors will succeed and predict an earnings bounce-back of around 57% during 2018. Meanwhile, the current share price of 758p throws up a forward P/E ratio of just over seven for 2018 and the forward dividend yield sits at almost 6%. Those forward earnings should cover the payout almost two-and-a-half times.

Assuming that Provident Financial can sort out its problems, which I think it will, the valuation looks cheap and the stock is more attractive to me than MySale.

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For investors on the lookout for the next Purplebricks or ASOS to see their retirement portfolio take off like a rocket, there is plenty to like about eve Sleep. In the half year to June, revenue increased a whopping 126% year-on-year (y/y), albeit from a very low base, to £11.5m. This certainly suggests the company’s in-house-designed mattresses, pillows and sheets are proving a hit with consumers.

It’s also good to see the management team, which includes several of the co-founders, isn’t relying solely on the direct-to-consumer online sales that are its core offering. The team has now struck deals with retailers such as Next and Debenhams to sell the products in-store. This serves the dual purpose of increasing overall sales as well as significantly increasing brand awareness.

However, there are some downsides that potential investors should be aware of. As the company ramps up expansion it is also ramping up spending and operating losses for 2016 increased to £11.3m, or nearly as much as the £11.9m posted in revenue. That said, listing the company did raise £35m before fees, so it can withstand several years of losses before needing to raise further funds.

Furthermore, with 77% of shares not in public hands, it’s unclear whether minority shareholders can be assured their needs will be prioritised. While eve Sleep is growing sales at a rapid clip and has a huge addressable market, buying shares of a lossmaking AIM-listed start-up does not appeal to me.

A flashier option

One London-listed online retailer that’s actually proven profitable is Australian flash sale group MySale (LSE: MYSL). The company runs flash sales across Australia, New Zealand, the UK and Southeast Asia and brought in A$3m in EBITDA in the half to December from A$136m in total revenue.

Equally reassuring for investors is that the business finally appears to be cash generative, with cash balances rising from A$27.5m to A$29.1m half-on-half. The fact that previous investments in building out marketing and supply chain capabilities are paying off bodes well for the firm’s profitability as it continues to grow revenue at a rapid pace, with online sales up 18% y/y in H1.

The downside is that even with a maiden pre-tax profit pencilled-in by analysts for the year to June, the company is still valued very, very highly at 176 times forward earnings. Potential investors should also be aware of the problems flash sale sites ran into in the US and Europe a few years ago when retailers no longer had to dump top-notch inventory at bargain prices to flash sellers as they did during and immediately following the Great Recession.

Although MySale turning its first profit is to be applauded, its shares remain far too highly valued for me to invest in a business model that that is unproven over the long term.

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The next Boohoo.Com?

Shares of flash sales retailer MySale Group (LSE: MYSL) have risen by 186% over the last year. Today’s trading update shows revenue rose by 18% to A$126.5m during the final six months of 2016. Earnings before interest, tax, depreciation and amortisation (EBITDA) rose by 100% to A$3m, beating expectations.

Today’s figures put the firm on track to deliver forecast revenue of A$275m this year and to potentially beat full-year net profit forecasts of A$1.76m.

MySale’s main market is Australia, where it operates a flash sales stock clearance business and is starting to sell its own bought-in stock. Customer numbers rose by 19% to 870,000 during the second half of 2016. A greater proportion of full-price stock lifted the group’s gross margin by 2.7% and pushed gross profit up by 17% to $38.4m.

A second attraction is that MySale now appears to be generating cash. The group’s net cash rose from A$27.5m to $A29.1m during the last six months.

Is this the right time to buy?

Investors who picked up MySale shares when they dropped below 50p in 2016 will be pleased with today’s results. But the shares have tripled since then and the stock currently trades on a 2017/18 forecast P/E of 273.

Clearly the business needs to grow into this valuation. But if profit margins and sales continue to rise, I believe the firm’s profits could easily double or triple over the next 12 months.

MySale’s valuation is too rich for me, but I can see the logic in buying a small stake in this stock, with a view to holding for the next one or two years.

A high-yield value play

If you prefer to focus on value and income instead of growth, then womenswear value retailer Bonmarche Holdings (LSE: BON) may be of interest. The group’s shares have fallen by more than 50% over the last year, but rose by 4% this morning, after the firm reported an increase in sales in the run-up to Christmas.

Bonmarche said that like-for-like store sales rose by 0.8% during the three months to 24 December, while online sales fell by 3.8%. Overall sales rose by 3.3%, thanks to a number of new store openings.

Chief executive Helen Connolly admitted that the fall in online sales was “poor” and said this remains “a key area of focus”. I think today’s figures are encouraging, although it may still be too soon to be sure that a turnaround is underway.

The question for investors is whether Bonmarche is value buy, or a value trap. The shares currently trade on a forecast P/E of 6.5 and offer a prospective dividend yield of 8.8%.

An ultra-cheap valuation like this usually indicates that the market is sceptical about a company’s ability to deliver.  

Today’s trading update confirmed previous guidance for adjusted pre-tax profit of £5m-£7m this year. That’s encouraging, but my calculations suggest that this level of pre-tax profit is likely to result in after-tax earnings below consensus forecasts for 12p per share. I think a figure of 8p-10p per share is more likely.

My view is that Bonmarche shares are fairly priced at the moment, but have significant potential as a recovery play.

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A superb business model

In the UK, retail sales increased by ‘only’ 18% in what proved to be a more promotional market. This figure may seem high compared to a number of its retail peers that have struggled of late, but elsewhere in the world ASOS performed much better. For example, in the US its retail sales rose by 42%, while in the EU they were 38% higher. Both of these figures are on a constant currency basis. Therefore, when sterling’s weakness is included, they increase to 66% and 49% respectively.

In terms of customer engagement, ASOS continues to gain in popularity. For example, during the period it achieved a rise in active customers of 25%, an increase in the average basket of 2% and a 6% higher order frequency. It expects to record a rise in sales over the medium term of 20%-25% per annum. However, the reinvestment of foreign exchange and US duty benefits in financial year 2017 mean that sales of up to 30% are forecast in the current year.

Valuation

As mentioned, ASOS has soared by 70% in the last year and this puts it on a price-to-earnings (P/E) ratio of 69.5. While this may seem excessively high compared to a number of its retail sector peers, online shopping specialist Mysale (LSE: MYSL) has an even higher rating of 193. Both of these figures indicate that share price falls could be just around the corner, although in ASOS’s case that seems to be more likely.

A key reason for this is that the company’s earnings growth rate in the 2018 financial year is expected to be 28%. When combined with its P/E ratio this equates to a price-to-earnings growth (PEG) ratio of 2.5. This indicates that its shares offer little margin of safety and could fall, even if weaker sterling continues to provide a boost to its non-UK sales outlook. By contrast, Mysale is expected to record a rise in earnings of 101% next year. This puts it on a PEG ratio of 1.9 which, while still high, is more appealing than its sector peer’s valuation.

Of course, Mysale may have a sound strategy and bright prospects, but it remains relatively unattractive at a time when a number of other retail stocks have wide margins of safety. For either stock, even a minor downgrade to profitability could send their shares tumbling. Since 2017 is shaping up to be an uncertain year for the global economy, neither stock seems to be worth buying at the present time.

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Furthermore, Mysale reported that its fourth quarter was profitable, with gross margins having improved as a result of driving through cost savings and making its business more efficient. This, combined with improving demand for the company’s products, means that the health of its bottom line is improving. As such, shares in the company have risen by over 10% today on the back of the release.

Despite this, Mysale’s share price is still down 78% since it listed in June 2014, with a challenging Australian economy hurting its financial performance and leading to a severe profit warning late last year. As such, investor sentiment remains relatively weak despite the company having been backed by major UK retail players such as Sir Philip Green and Mike Ashley.

However, today’s improved outlook, coupled with the appointment of a new Chairman, could be the start of an improved period for the business. And, with Australian monetary policy becoming increasingly loose, as well as an improved outlook for other key markets such as the UK, Mysale may be able to continue the strength that it has shown in the final quarter of its financial year. Prudent investors, though, may wish to await further evidence of this before buying a slice of the business.

Meanwhile, consultancy company WYG (LSE: WYG) has been up by as much as 5% today despite no significant news flow having been released by the company. Of course, investor sentiment has been improved since the company announced a new £25m revolving credit facility last week and, looking ahead, the company’s shares have significant capital gain potential over the medium term.

That’s because WYG is expected to post a rise in its bottom line of as much as 11% next year, which is an impressive growth rate. Despite this, the company trades on a price to earnings (P/E) ratio of just 11.8, which equates to a price to earnings growth (PEG) ratio of only 1. This indicates that the company’s share price could continue the run that has seen it rise by 11% since the turn of the year.

Furthermore, WYG has significant income potential, with its yield of 1.2% having the scope to rise substantially in 2016 and beyond. That’s because, at the present time, WYG pays out just 14% of its net profit as a dividend, which indicates that dividend payouts could move much higher. For example, if it were to pay out half of its profit as a dividend, it would equate to a dividend yield of 4.3%, which is very enticing. And, with its bottom line set to grow at a brisk pace, shareholder payouts could move upwards very quickly, thereby making WYG a stock with great income potential as well as capital gain prospects.

The post Why Mysale Group PLC & WYG PLC Are Surging Today appeared first on The Motley Fool UK.

Interestingly, MySale said that although sales were rising strongly in the firm’s newer markets — Asia, the UK and US — trading was “more challenging” in MySale’s original markets of Australia and New Zealand, partly due to increased competition.

This suggests to me that MySale’s business model — selling other retailers’ discounted old stock to its mailing list — is easy to duplicate, and lacks defensive qualities.

Given that MySale’s share price has now fallen by almost 50% since the firm’s flotation in June 2014, I think it’s worth taking another look at some of the main alternatives in the online fashion sector.

ASOS

ASOS (LSE: ASC) (NASDAQOTH: ASOMF.US) is the biggest of the UK’s online-only fashion retailers. With sales expected to rise by nearly 20% to £1.2bn this year, ASOS is becoming a significant player.

Despite this, ASOS has disappointed markets this year. The firm’s shares price is down by 55% so far in 2014, and a series of profit warnings have caused analysts to cut earnings per share forecasts for the current year by 26% in the last three months alone.

What’s more, ASOS’s growth appears to be slowing. Although UK sales rose by 24% during the last quarter, international sales fell by 2%, leaving total sales just 8% higher — hardly enough to justify trading on 64 times 2014/15 earnings, in my view.

Boohoo.Com

Boohoo.Com (LSE: BOO) is a fast-growing own-brand retailer run by a group of experienced fashion industry veterans who have previously supplied goods to a number of well-known UK retailers.

Sales rose by 31% during the first half of this year, and the firm’s full-year profits are expected to rise by around 50% this year, and by 35% next year. This puts Boohoo shares on a forecast P/E of 37 for 2014/15 and 27 for 2015/16, making them much cheaper than ASOS.

Which retailer should I buy?

I suspect that it’s too late for big gains from ASOS, and I’m concerned that MySale’s growth appears to be slowing so rapidly in its established markets.

In my view, Boohoo.com is the pick of the bunch, and could deliver decent gains to investors over the next year.

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MySale, which is the most successful online “flash sales” fashion retailer in Australia and New Zealand, will provide the e-commerce platform for Sports Direct, giving it immediate access to MySale’s existing 12 million members when the websites launch later this year.

Sports Direct has also said that it will be opening three stores in Australia and one in New Zealand, and that it will soon be announcing a partnership “with a leading Australian retail company.

Commenting on the new joint venture, Dave Forsey, Sports Direct’s Chief Executive, said: 

“We are delighted to announce this partnership with MySale, which will give Sports Direct access to the tremendous markets in Australia and New Zealand and enable customers in both countries to benefit from our quality and unbeatable value. It will be great to enter these markets, where sport is a way of life. I have been really impressed by the team at MySale and look forward to working with them.”

At 724.5p, Sports Direct’s share price is up 1.7% so far in 2014, having fallen back significantly from a gain of almost 30% made by early April. But over the past five years its share price has increased by over 800%, compared with the FTSE 100’s 63% rise.

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