But in this article, I’ll explain why I believe this 135-year-old business now lacks appeal for long-term investors. And why I’m also bearish on a more youthful retail name, Footasylum (LSE: FOOT), whose shares have also rallied hard. If I owned these two stocks, I’d be happy to sell them on the back of their recent gains.

You can’t teach an old dog

Marks & Spencer has been on a slippery slope since its profits peaked as long ago as the late 1990s. The company came into the 21st century with a restructuring strategy and recovery plan in progress. By the time of its results for its financial year ended March 2002, it was able to report that restructuring and recovery was “substantially completed.” 

The following year, the message was: “we have re-built the foundations on which this group can grow and prosper.” Just a year later, it revealed that “the initial surge in the recovery of our Clothing and Food business faltered.”

And so it has gone on for 20 years. New management team, new transformation plan, green shoots that fail to develop into sustainable growth. One step forward and two steps back. Will it be different this time? Given the company’s long history of flattering to deceive, the inherent cyclicality of retail, and structural shifts in shopping habits (making the high street a harder place than ever to do business), I don’t hold high hopes.

A rating of 11.7 times forecast current-year earnings holds no appeal for me. Nor does a dividend yield of 6.4%. The company’s desultory dividend record includes two rounds of hefty cuts since the turn of the century.

From pedigree to chum

Footasylum is a relative newcomer to the high street. It was founded in 2005 by David Makin, who had previously been a co-founder of JD Sports back in the early 1980s. He was soon joined at Footasylum by the other JD Sports co-founder, John Wardle.

By the time Footasylum floated in late 2017 (at 165p a share), Wardle was executive chairman and Makin’s daughter, Clare Nesbitt, was chief executive. The prospectus told us that Wardle would be stepping down, and his shoes filled by Barry Brown, who had served as chief executive of JD Sports between 2000 and 2014.

The company’s pedigree attracted a good deal of investor interest, and the share price climbed rapidly to over 250p. However, after three profit warnings, the latest coming last month, the shares hit a new all-time low of under 24p. Then, last Monday, they almost doubled in price in the blink of an eye.

This was on the back of JD Sports issuing a statement that it had acquired an 8.3% interest in Footasylum and was prepared to acquire up to 29.9%. However, it stressed “it is not intending to make an offer.” 

Whatever ultimately happens here, Footasylum is currently struggling and isn’t expected to turn a profit for at least three years. It’s a stock I’d much rather be out of than in, as I see some far more attractive opportunities in the small-cap space.

The post This FTSE 100 dividend share isn’t the only retailer I’d sell right away appeared first on The Twelfth Magpie.

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G A Chester 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.

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. 

The post This nightmare growth stock fell 90% in 2018 and there could be worse to come appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Joules Group. 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.

Can the same be said about Frontier’s industry peer and creator of “indie premium video games” Team17 (LSE: TM17)? And will the company be able to dodge the IPO curse — the tendency for newly-listed companies to disappoint after initial enthusiasm has waned?  

Up over 4% in value in early trading, the market would appear to be giving a tentative ‘yes’ to both questions.

On track

Representing the first real chance for many to begin forming an opinion on the company, today’s maiden interim numbers for the six months to the end of June were always likely to receive attention.

Hailing a “record performance”, revenue rose 48% to £15.4m with adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) increasing 36% to £4.9m. Cash flow from operations soared by a little under 275%. 

Confident in meeting expectations for the full year, Team17 expects revenue to further improve in H2, partly driven by the release of new products (Overcooked 2 hit shelves last month). Gross margins are also expected to rise.

Joining AIM back in May following a “significantly oversubscribed fundraising” — the proceeds of which (£107.5m) will be used to repay debt, incentivise employees and grow the company’s profile — Team17’s stock rose to as high as 280p a pop back in late July, only to sink back to around its IPO price before today. Given that all appears to be going to plan, a re-test of previous highs isn’t out of the question.  

As is to be expected, however, being part of an industry that has become a firm favourite with investors over the last couple of years means that Team17’s stock isn’t cheap to acquire. Already pushing 28 times forecast earnings before today, any prospective owners will need to be confident that the company can deliver on its growth ambitions. So far, so good.

Foot in mouth

As mentioned, investing in a newly-listed company doesn’t always work out. Having plummeted in price from 265p a share last December to a little over 32p today, trainer retailer Footaslyum (LSE: FOOT) has already cost its owners an arm and a leg.

I’ll confess to becoming interested in the stock when it pretty much halved in price back in June. Since then, however, it’s become apparent that any recovery is going to take far longer than expected.

As my Foolish colleague Peter Stephens wrote earlier this month, Footasylum continues to struggle in what remain tricky conditions for most retailers with a high street presence. With earnings now expected to be firmly down on those reported in the previous financial year, things could easily get worse before they get better.

Hindsight is a wonderful thing, particularly in the stock market. Nevertheless, Footasylum’s woeful performance to date serves as a reminder that no investment is ever risk-free. Although the continued downward pressure on the share price should generate interest from value investors over the next few weeks, I think it would be a mistake to buy at the current time, particularly as broker Peel Hunt has already cut its target to as low as 22p.

The post Will this promising growth stock avoid the IPO curse? appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentoned. 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.

Looking ahead, further weakness may be ahead in the near term, with investor sentiment seemingly downbeat. But in the long run, could either share deliver improved performance which helps them to outperform the FTSE 100?

Uncertain future

Footasylum’s trading update released on Monday showed that it is experiencing challenging trading conditions. Weak consumer sentiment has impacted negatively on its trading performance since the beginning of the current financial year. It has been especially weak over the summer, and this means that its adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) for the full year is set to be less than half of the 2018 level of £12.5m.

The company is seeking to boost its financial performance through policies such as upsizing certain stores. While this could have a positive impact on the company’s future, there appears to be little sign of a recovery in consumer sentiment in the near term. As such, it would not be a major surprise for trading conditions to remain at difficult levels, which could translate into further share price falls.

Although the Footasylum share price may now have a lower valuation than it has had in recent months, the reality is that the company is experiencing a highly-challenging period. Therefore, it may be prudent to await evidence of the start of a turnaround before buying the stock.

Turnaround potential

With the BT share price having fallen from around almost 500p to 220p within the last three years, it is clear that investor sentiment has been weak for a sustained period of time. A number of telecoms companies in the FTSE 100 and FTSE 250 have experienced difficult periods in the same time period, with competition in the quad-play sector ramping-up as operators seek to diversify their product offerings. This could cause competition to rise, and may mean that margins are squeezed at a time when consumer confidence is weak.

Looking ahead, BT is expected to report a fall in earnings in each of the next two financial years. The stock market, though, seems to have factored this into the company’s valuation. The stock has a price-to-earnings (P/E) ratio of around 8.6, which suggests that there is a wide margin of safety on offer. This could cause increased demand for the company’s shares at a time when a number of FTSE 100 stocks may be starting to look overvalued.

Clearly, there is a long way to go with the company’s turnaround. A new management team will need time to put in place their own ideas and then execute their plan. However, with a low valuation and a diverse business model, the long-term prospects for the stock could be surprisingly strong.

The post Thinking of buying the Footasylum and BT share prices after 50%+ falls? Read this first appeared first on The Twelfth Magpie.

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Peter Stephens 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.

Here are the three of the biggest losers in 2018 so far.

Must do better

No prizes for guessing department store retailer Debenhams (LSE: DEB) features on the list. Following multiple profit warnings, the shares are down 66% since the start of the year. For regular readers of these pages, this should come as no surprise. Many at the Fool — including myself — have been bearish on the business for a while.

Earlier this month, the company was forced to reaffirm its cash position after it was reported that credit insurers had refused cover for some of its suppliers, meaning that the latter would not be protected if Debenhams went bust. In such a situation, these suppliers could demand payments from the company in advance, hence the suspected pressure on its cash pile.

As one of the most shorted stocks on the market, it would seem that many do not share management’s confidence in Debenhams’ financial health. While betting against a company can certainly backfire (Ocado, anyone?), I’m inclined to think that the business is highly likely to follow BHS to the retail graveyard.

Trainer seller Footasylum (LSE: FOOT) is another heavy faller this year — down 72%. For a company that’s only recently listed, that’s pretty inexcusable.

Despite revenue and adjusted EBITDA moving 33% and 12% higher respectively over the last financial year, statutory pre-tax profit dived from £8.1m to £1.9m due to costs associated with its IPO. 

With the company hinting that it had become yet another victim of high street malaise, forward guidance was also disappointing with growth now expected to slow as a result of investment to capitalise on peak trading periods in the second half of the year. Suggestions that top brands are becoming increasingly keen on selling to customers directly could also be problematic for firms in this space going forward.

Footasylum isn’t necessarily down and out but a P/E approaching 16 still looks far too expensive when there are less risky options elsewhere.

Holding the dubious gold medal position for worst performing retail stock — and ironic share ticker — over the last seven months goes to Carpetright (LSE: CPR) with holders enduring an 83% fall in the stock since January. Quite whether the shares can be resuscitated from here is debatable.

To recap, full-year results (to the end of April) were simply awful, revealing an underlying pre-tax loss of £8.7m in stark contrast to the £14.4m profit a year earlier. As suppliers grow increasingly cautious, Carpetright’s balance sheet also looks seriously stretched with net debt over five times what it was in 2017. 

As part of its Company Voluntary Arrangement, the firm will close 81 of its stores by the end of September. Those remaining are being refurbished and new branding introduced in an attempt to drum up business.  

But with talk of restructuring activity and the warm weather having a big impact on trading in the first eight weeks of the financial year, I don’t hold out much hope for those still invested.   

The post The 3 worst performing retail stocks of 2018 (so far) appeared first on The Twelfth Magpie.

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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.

That said, today’s 50% fall in the share price of recently listed lifestyle retailer Footasylum (LSE: FOOT) will surely come as a surprise to even the most bearish market participants, particularly given the initially solid-looking numbers in today’s full-year results.

Sales up 

Revenue at the small-cap jumped 33% to £195m over the financial year to 24 February with the company reporting “strong growth across all channels and product categories”. Interestingly, 30% of the latter came from online where sales soared 41%, no doubt helped by investment in the company’s main website alongside launches of sites and apps for Footasylum’s own brands Kings Will Dream and SEVEN.

All told, adjusted earnings before interest, tax, depreciation, and amortisation (EBITDA) rose 12% to £12.5m, although margins were lower due to money being ploughed back into the company. Last year saw the creation of a new in-house studio in Manchester alongside the opening of a second warehouse facility in Rochdale and 10 new stores. Staff costs also increased following the 21% jump in headcount over the reporting period to 2,270 employees. 

A profitable company posting decent numbers with a growing online presence. What’s not to like? 

So, why are the shares crashing?

A lot of today’s share price capitulation appears to be down to Footasylum’s outlook for next year. 

In addition to remarking that recent trading had not been immune to the general malaise experienced on the high street, CEO Clare Nesbitt stated that the Rochdale-based firm’s desire to open new stores in order to capitalise on its peak trading period in H2 will lead to higher costs that will restrict earnings growth. Indeed, pre-tax profit is now expected to be roughly 25% lower than that previously expected.

Is the market reaction overdone? I’m inclined to answer in the affirmative.

While I agree with broker Liberum that a reduction in profit guidance is “clearly disappointing” — even more so given that the company only came to the market last November — it surely doesn’t warrant a near halving of the company’s value in a single session. Relative to other retailers such as, say, Mothercare or Debenhams (the latter issued yet another profit warning this morning), Footasylum’s problems appear fairly minor. The company is clearly doing a lot of good things online and it’s not as if its image is staid or tired. Nor is the company ridiculously indebted. Indeed, a cash balance of £11.4m at the end of the last financial year means its balance sheet is in far better shape compared to peers.

Whether the stock will continue to fall or bounce back quickly is, of course, hard to say. Moreover, attempting to predict and capitalise on short-term market movements is counter to the Foolish philosophy of buying quality companies for the long term.

Nevertheless, like retail peer Superdry, Footasylum has now earned a place on my watchlist. A frothy looking valuation of 30 times forecast earnings before today was — in retrospect — clearly too high but today’s (over)reaction could see the shares become something of a bargain once the dust has settled.

The post This small-cap stock might be a falling knife worth catching after HALVING in price appeared first on The Twelfth Magpie.

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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.

Time to pump the brakes?

The first recent IPO I’m taking a look at today is £1.2bn market cap automotive parts supplier TI Fluid Systems (LSE: TIFS). It is the market leader in production of light vehicle components such as brake lines and fuel tanks for major global manufacturers from its manufacturing base of 123 locations in 29 countries.

While I like that TIFS is a market leader and reckon its investors could do very well if global auto markets stay hot, I see a few red flags that will stop me from investing in it at this point.

The first is the nature of the industry, which sees suppliers constantly squeezed by OEMs to produce greater volumes of parts more quickly and at lower prices. Furthermore, car makers often do not sign agreements to buy a certain volume of suppliers’ output, meaning if global auto sales fall, TIFS and other suppliers are left with expensive facilities, fewer sales and falling operational gearing.

Second, private equity floats always make me nervous, which is why TIFS gives me pause as it was taken public by PE shop Bain Capital, which still owns over 60% of the shares. On top of that the entire £320m raised at admission went to paying down some of the still substantial debt TIFS was saddled with during Bain’s ownership.

Can they repeat their previous success?

Today I’m casting my eye over streetwear retailer Footasylum (LSE: FOOT), which was started by one of the co-founders of JD Sports, is run by his daughter as CEO, and claims the other co-founder of JD Sports as the chairman of the board.  

The group focuses on the 16-24 age range and seeks to supply them with the latest on-trend products.These come from well-known multinational brands such as Nike, plus boutique brands, and its stable of own-labels. Names such as Glorious Gangsta and Condemned Nation seem pulled straight from some 90s gangster rap track rather than the minds of 50-year-old millionaires from Bury. But it works.

The fancifully named fashion labels are proving popular with the company’s target age group as revenue from fiscal year 2015 to 2017 increased by a CAGR of 37% to hit £147m, with EBITDA up 126% annually over the same period to £11.2m. As the chain adds new stores to its estate and sees a greater proportion of online sales, this trend is continuing with revenue up 33.4% year-on-year to £89.8m in the 18 weeks to December.

Looking ahead, the group will benefit as long as streetwear and athleisure are the name of the game in fashion. And while Footasylum is going up against larger, better financed rivals in catering to its fickle target age group, its small size and ability to quickly stock the hottest products is probably more of a help than a hindrance.

For now, I’m happy to sit on the sidelines and see if current fashion trends have more staying power than previous ones while Footasylum grows into its rich valuation of 42 times earnings.

The post 2 hot new IPOs that could make you very rich appeared first on The Twelfth Magpie.

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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.