Small Cap Value Report (Wed 24 July 2019) - JOUL

Good morning, it’s Paul here.

I hope everyone is coping alright with the extreme heat this week. My apartment is unbearably hot at the moment, so I had to abandon work yesterday by mid-afternoon.

Let’s start today with an interesting results statement from yesterday.

Joules (LON:JOUL)

Share price: 249p (down 2.4% yesterday, at market close)
No. shares: 87.8m
Market cap: £218.6m

Annual Results – 52 weeks ended 26 May 2019

This “preppy” fashion brand is a bright spot in an otherwise rather grim sector. I was wondering how Joules was faring, after reading press reports that competitor Jack Wills looks to be in financial trouble, and might be offloaded by its private equity owner.

Maybe Joules should not be seen as “preppy”. Doing some googling, it is mentioned when I search for preppy, but looking at the product amp; lifestyle imagery, Joules actually seems more focused on middle/upper-class families, outdoor activities amp; countryside lifestyles.

There’s a useful results presentation slide pack here, which also includes lots of nice photos of the product, in lifestyle shots. Worth a look. Slide 17 is interesting, in that the group spends a bomb on marketing, £9.5m, which could help explain its brand appeal.

As you can see below the key Pamp;L figures for JOUL look really good;

At 249p per share, that’s a PER of 17.7 – rather expensive these days, for this sector.

Outlook – sounds reassuring;

We are pleased with the Group’s performance to date in the early stages of our new financial year, with trading in line with our expectations.

Looking ahead, whilst the consumer retail environment is anticipated to remain challenging, particularly in the UK, the Board and I believe that Joules remains well-positioned for continued success both in the UK and our target international markets.”

It sounds as if JOUL must be gaining market share from struggling competitors, perhaps? As weaker competition drops out of the market, and close stores, then that leaves more business for the survivors.

KPIs table – this is a really good idea, presenting some key metrics in 5-year tabular format. I’d like to see this adopted by other companies in their results statements.

The key KPI for me, is online sales. As you can see (highlighted by me), this is nearly half of all business, and growing strongly. That’s very important, as I wouldn’t touch any retailer with weak online sales these days;

There’s another table, of financial KPIs, which is also very useful indeed, and shows excellent 5-year performance. Although note that both gross, and EBITDA margins, have dropped a little in the most recent year – but not enough to cause concern;

What a model of clarity these results are, absolutely excellent stuff, and very investor friendly. It would take a lot of work for us to put together these tables ourselves, delving through 5 sets of accounts, so it’s absolutely terrific that JOUL presents this information to us.

Balance sheet – looks pretty solid. NAV is £52.1m, less intangibles of £16.9m, gives NTAV of £35.2m, which is OK.

I note that intangible assets have gone up by £4.2m vs last year, which could indicate development costs being capitalised, so I’ll check the cashflow statement next for that.

Working capital looks fine. It has £10.2m gross debt, more than offset by £16.0m in cash. This suggests that the cash position could fluctuate a fair bit, but that’s not a problem, and it’s healthy overall.

Cashflow statement – as you often find with retailers amp; hospitality sector, when hefty depreciation charges are added back, the cashflow is often much better than people realise. That’s the case here, with a lovely £23.5m operating cashflow in FY19, and £21.1m in FY18.

Most of the cashflow is spent on capex, but they’ve not given the split of what is tangible, and intangible, of the total £11.5m capex. Although I can work it out, as follows:

Intangible assets grew by £4.25m in the year. Add back the amortisation charge of £2.67m, and I make that intangibles capitalised of £6.9m. That’s 60% of all capex. I’ve done some more digging in the 2018 Annual Report, and all intangibles assets are described as “IT Systems” – a new ERP system is mentioned. I wonder if any development costs of its websites are also capitalised? That’s not clear from the annual report, but I’d like to find out (as personally, I see IT development spending as payroll, and hence part of the normal running costs of the business).

There again, its eCommerce operations are growing so strongly, the investment seems to be paying off.

Note that significant additional capex of £14m is earmarked for fitting out the new Head Office. This seems an awful lot, and is likely to see the net cash position reduce in future.

Dividends are modest at this stage, with a yield just over 1%. Once expansion slows down, there should be scope to pay bigger divis in future, so the low yield doesn’t put me off at this stage of the group’s growth.

Director remuneration – seems a tad high, at £2.3m last year, FY18, for 3 Execs, and 3 NEDs. That included substantial bonuses. Directors own 34% of the shares. Share based payments were made of £2.7m in FY19 – considerably more than dividends paid to shareholders in the year of £1.8m.

I do wonder therefore if the split of the rewards is skewed a bit too heavily towards Directors?

My opinion – despite a few niggles above, the bottom line is that Joules seems to be powering ahead, when many other fashion brands amp; retailers are really struggling.

Its branding, and product, do seem distinctive, and are clearly striking a chord with affluent consumers.

Current year forecast is for a modest step up in adj EPS from 14.1p to 15.1p, so a PER of 16.5 – which looks about right to me. The forecast could be beaten, as it’s quite a modest uplift.

If the company can continue growing as it has done in the last 5 years, then this share could be a good long term investment. It strikes me as more than just a retailer. It’s investing a lot in product, and branding, and that is clearly working. Licensing revenues are small, but growing strongly, with e.g. DFS sofas branded as Joules.

Overall then, it gets a thumbs up from me, and would be something I might consider buying myself once the macro picture looks more stable.

My main concern is that, in the current climate, how high can a fashion brand’s shares go? Would the current market be prepared to rate JOUL above a PER of 20? Probably not. Which means that, arguably, there’s not much upside from the current PER of 16.5, in the next (say) year. If we go into a recession, then the rating could continue to fall, who knows?

So much though I like the company, I feel it’s probably not the best time to buy its shares right now. It’s going on my watch list though.

Stockopedia likes it, but is saying the shares are too expensive;

Stockopedia