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UK Equity Research; 2016 Black Friday

2016 “Black Friday” is this a retail opportunity?


Traditionally in the USA, “Black Friday” referred to the time of the year when shops moved from the “red” i.e. loss-making to the “black” i.e. profits. The phrase was coined in the 1960s. The UK started “Black Fridays” in 2013 via an ASDA ad campaign “Walmart’s Black Friday by ASDA”. However the experience has been decidedly mixed for businesses with some downplaying the event.

We are told there are bargains to be had on Friday 25th November though a cursory look online tells me these offers are already available online starting this week. “RTFP” – “read the fine print” springs to mind. The event should be well attended in 2016.

Retailers use the Black Friday event for inventory management rather than generating profits. In 2015 Black Friday was the biggest shopping day of 2015 with £2bn spent in shops and online. However the concept has been modified, to reduce the danger that Black Friday damages the Christmas shopping season which is key to retail profits.

The Black Friday event comes in the context of a year of upheaval for UK retailers, due to higher input costs from the collapse in sterling, a volatile consumer, and pressure from online penetration. Retailer shares (excluding ASOS) have been hit.

Company Market Capitalisation Reporting Currency FX Exposure (% of purchases) FX Hedge Movement since June 23rd (%)
ASOS £4.14bn STG c. 15% No 31.1
Brown (N) £0.56bn STG c.55% Yes 98% of FY17 at $1.46 -2.0
Carpetright £0.13bn STG Not disclosed No -34.0
Debenhams £0.70bn STG 35% US$ Yes $1.50 -17.5
Marks& Spencer £5.38bn STG 65% US$ Not material 1.5
Next* £7.37bn STG 64% US$ 36% € / £ Yes: $1.51 FY17 -9.2
Sports Direct Int £1.86bn STG >80% US$ Yes $1.19 FY17 -2.2
Supergroup £1.24bn STG c. 90% various Yes 2.3

Source: Fidessa

The above table shows the varying impact of sterling’s descent. Curiously ASOS has a very low exposure as most of its purchases are via wholesalers and invoices are settled in sterling. Other retailers, (Sports Direct) were caught by not having hedged their FX exposure prior to the Brexit vote (June 23rd) and the flash crash on 7th October.

Brown (N) – FTSE 250 – BUY

Based in Manchester, N Brown is a multi-channel retailer of specialist fit fashion, its brands include “JD Williams”, “Simply Be”, “Jacamo” – together these comprise its “Power Brands”. In addition N Brown has a number of “secondary brands” (“Fashion World”, “High & Mighty”, “Marisota”) and its “traditional segment” (“Ambrose Wilson”, “Premier Man”, “Julipa” and “House of Bath”.

N Brown product is primarily sold via mail order and online. It has a small store portfolio for its “High & Mighty” brand which has reduced in 2016. The appointment of Freddie Flintoff as brand ambassador for Jacamo helped revenue growth (+3.3%) at H1 2017. There has been a strong start to the Autumn Winter season.

However N Brown shares are not far from decade lows. This reflects slowing revenue growth (+1% to £300.9m) and higher expense growth (+3%), pressures on margins (-190bps) and higher bad debt expenses associated with more credit sales.

Consensus profit estimates; Brown (N)
Year End Revenue (£m) Net Income (£m) EPS (P) DPS (P) P/E (x) Yield (%) Share Price (p)
Feb 16 866.2 68.1 24.1 14.2 8.2 7.2 197
Feb 17 886.4 64.5 22.7 14.0 8.7
Feb 18 915.8 64.8 22.6 13.9 8.7

Source: Bloomberg

The consensus forecasts envisage 2% revenue growth over FY2017 and 3.25% in FY2018. These forecasts underestimate lower exceptional costs and improving margins as more sales migrate online.

Company BWNG

Key Catalysts

N Brown is introducing new channels, trialing Jacomo on ASOS in January 2017 – this should be rolled out later in 2017.

Encouraging growth via m-commerce – with online penetration now at 68% (+5%)

US operations are positive, revenues grew at 24.5% in 2016 H1, a new web platform will enable global “ship anywhere” capability from Q1 2017.

Overall we are encouraged the right strategy is in place to slim down physical presence replacing with higher margin online sales.

Share Price 197p
Target Price 250p
52 Week Hi/Low 364p/160p
Shares O/S 283.4m
Market Capitalisation £558.3m
Avg. Daily Volume 490.2k
Dividend Yield 7.04%

Source: Fidessa

Key Risks to Price Target

  1. Ongoing revenue declines from Traditional brands weighing on overall growth
  2. Recent improvements in bad debt charges could reverse
  3. US operations will take time to reach critical mass

NEXT plc – FTSE 100 – BUY

Next delivered significant investor returns in the last decade via strong growth in Next Directory (8.1% compound annual growth 2007-2016), improved Next Retail sales but low growth in its store network (540 stores v 480 in 2007). The board has consistently applied financial discipline shrinking the Next share count from 227m to 151m via a £2.32bn worth of share purchases and lifting the annual dividend to 158p from 49p in 2007.

In H1 2017 Next Retail sales growth declined to just +0.1% lowering total Next sales growth to 2.6% – the operating margin declined to 12.4% a large 2.5% drop (due to larger end of season sales). Noting the trends, CEO Lord Wolfson cautioned that 2016 felt a lot like 2008. The shares have weakened from £80 last December due to concerns that cost growth (c.5%) will exceed revenue growth (0.5%).

The issue for Next is 64% of purchases are US$ denominated with the balance in € and sterling. Next estimates the hedges for FY2018 will be applied at around $1.36, a possible 10% cost increase. There are mitigating factors, such as improved product sourcing and lower commodity prices – it is possible cost increases will be nearer 5%.

Consensus profit estimates; NEXT
Year End Revenue (£m) PBT (£m) EPS (p) DPS (p) P/E (x) Yield (%) Share Price (p)
Jan 16 4177 836.1 435 158 11.5 3.16 4996
Jan 17 4196 800.8 437 198 11.4
Jan 18 4250 784.8 445 171 11.2

Source: Bloomberg

The consensus forecast for Next suggest sub 1% revenue and EPS growth for Fy17 due to higher input costs. The shares have substantially de-rated to a PE of 11.5x.

Company NXT

Key Catalysts

Next is planning to end Fy17 with a similar debt load due to its payout plans. It is planning special dividends / buybacks worth £294m (200p per share) a 4% return in addition to the ordinary dividend of £232m (158p) offering a yield of 3.16%. In our view the payouts are secure and will help EPS hold up despite higher costs.

The recent rise in bond yields will positively benefit the pension deficit reducing the £30m top up payment Next expected to pay until 2021.

Share Price 4996p
Target Price 5500p
52 Week Hi/Low 8015p/4384p
Shares O/S 147.06m
Market Capitalisation £7.34bn
Avg. Daily Volume 1.06m
Dividend Yield 3.1%

Source: Fidessa plc

Key Risks to Price Target

  1. Sterling devaluation will impact Next purchasing costs from Spring 2017
  2. Share buyback plans for FY18 as yet unknown
  3. £150m pension deficit may require top up annual payments.

(NB. “PBT”- profit before tax, “EPS” earnings per share, “DPS” dividend per share, “P/E” price to earnings)

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