Small Cap Value Report (Mon 14 Jan 2019) - QUIZ, RBG

Hi, it’s Paul here.

This is a dual-purpose report – partly the placeholder for Monday morning. Also to catch up from Friday, in particular with my thoughts on the latest profit warning from “omni-channel” fashion retailer, QUIZ (LON:QUIZ) .

Revolution Bars (LON:RBG) is reporting its peak period Christmas amp; NYE trading today. As this is my 2nd largest long position, I’ll be heavily focusing on that, once I’ve got the Quiz section out of the way.

Share price: 24p (down 33% on Friday, at market close)
No. shares: 124.2m
Market cap: £29.8m

(at the time of writing, I hold a long position in this share)

Christmas Trading Update (profit warning)

Quiz calls itself an “omni-channel” (meaning physical stores, concessions, online, and international) fashion brand (mainly womenswear, with a focus on garments for special occasions, rather than basics).

AIM Admission

• Floated on AIM in July 2017, by Panmure Gordon, at 161p per share
• Raised £9.4m (after fees) for the company, from issue of 6,583,851 new shares
• 100% family-owned prior to float, 54% after float
• Family trousered cash of £89.8m (after fees) from selling 46% of the company in the float
• Share price has since lost 85% of its value, in 18 months

The float was very polished, presenting the company as an exciting growth story, achieving a high valuation. I attended a presentation shortly before the float, and was impressed with management. The online growth seemed to offer the potential for this to become something like Boohoo (LON:BOO) in the long run. Thankfully, I gradually lost interest in it, as it became clearer to me that the float price had been set too high, and that online (the bit that interested me most) was only a smallish percentage of total revenues. Also, from looking at product, I began to have doubts about the quality of the product designs.

As you can see from the share price chart, the wheels really came off in Oct 2018, and it’s been downhill ever since;

Oct 2018 profit warning – there was a nasty profit warning, which I reported on here. Low footfall was blamed, but I stated that it was more likely that the new in autumn range had flopped – making another profit warning likely.

So at the time, I kept my distance, thinking that the share could drop further. Although I never imagined it would crash down to just 24p now.

What’s gone wrong now? In summary, this is what the most recent, 11 Jan 2019, profit warning said;

Period covered: 6 weeks from 25 Nov 2018, to 5 Jan 2019

• Total group revenue up 8.4% (not like-for-like though)
• Online – very good growth still, up 34.1% (including own website revenues up a very impressive 50.8%) – this is, by far, the most interesting part of the group
• Stores amp; concessions saw revenue up 1.6%. Again, this is not LFL, so fairly meaningless. Due to new store openings, the (undisclosed) LFL performance is certain to be negative. Obscuring the truth is not helpful
• New stores – 3 new, and 2 enlarged – pleased with initial performance
• Strong balance sheet (this is actually true, see below) with £12.3m net cash at 5 Jan 2019, which is 41% of the market cap
• Challenging retail environment (especially in Nov 2018) – fair comment, this is true
• Trading improved over Xmas, but not enough to catch up. Overall sales below expectations
• Prudent to revise down expectations for remainder of financial year 03/2019
• Lower gross margin in H2 (6m to 03/2019) – at 60.5%, down from 62.0% in H1. However, 60.5% is still an excellent gross margin
• Increased overheads, to drive growth

Revised guidance – helpfully, the company quantifies the hit to revenues amp; profit;

 (work-in-progress)

High gross margin

Concessions – DEB risk

Mgt incentivised – risk of cheap buyout

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