Footasylum profit warning sees investors running for exits
Footasylum issued a trading update on Monday and it was keenly watched as it was hoped the former stock market darling would have regained some of its momentum. But it was not to be and a profit warning saw panic selling of the shares.
The last time the London-listed retailer had reported to the market some months back, its shares had gone into freefall as it reined-in the lofty expectations of investors following its IPO. It shares had been rising since and while Monday’s trading statement mixed both good and bad news, there was too much of the latter with the profit warning sending its shares back down by almost 50%.
The company said that the second half, the current six months that ends on February 23, has been tough, even if the first half was less so. It explained that while “trading since the beginning of the current financial year has been impacted by weak consumer sentiment on the high street, the store performance for May and June was positive. However, during July and August [it] was more challenging which, in the context of there being no sign of a recovery in the short-term on the high street, has led the board to reassess its overall expectations for the balance of FY19.”
That means online and wholesale revenue are continuing to perform strongly year-on-year, but store sales have been “disappointing”, which has been “exacerbated by some unforeseen delays in new store openings and upsizes.”
Despite “an ongoing programme of investment to drive sales,” Footasylum's revenue growth for FY19 is now expected to miss current market expectations. As a result of this, and “a lower overall gross margin from a higher amount of clearance activity in stores,” the board now expects adjusted profit on an EBITDA basis for the full year to be “significantly lower” than previous guidance, at less than half of FY18’s figure of £12.5 million.
It will be a disappointing outcome after the company was undeniably strong on the retail front in the first half, even though profits remained elusive (partly due to investment).
STRONGER FIRST HALF
Footasylum also said Monday that for the six months up to August 25, revenue was £98.6 million, which is an 18.5% year-on-year rise. Store revenue from its 66 locations was up 12.4% to £66.3 million, while online it grew 28.5% to £30.2 million. That was an important increase with online sales now accounting for 30.6% of the total, compared to 28.2% a year ago. And wholesale, although it's still a small part of the company’s business, did well too, trebling to £2.1 million.
Despite the powerful rises, Footasylum expects to report a small adjusted EBITDA loss for the first half “reflecting a lower gross margin and higher costs from investment in the company's operations.” The company will also report over £2 million of exceptional income (excluded from adjusted EBITDA) from the early termination of the lease on one of its Birmingham stores.
But it was the full-year profit warning that made the headlines and investors reacted predictably, sending its shares sharply down. They had once reached a high of almost £2 but were trading at 44p each early on Monday.
So what exactly is the business doing to turn itself around? Footasylum “continues to invest in improving the company's consumer offering ahead of peak trading, and the board has been encouraged by the progress made to date, including the successful delivery of several technology projects in the period,” it said. “The strategy to deliver additional store upsizes alongside new store openings is also progressing, with six new store openings and further upsizes expected to be completed by December.”
Management said it believes that upsizing certain stores will “materially improve Footasylum's existing strong brand relationships while enhancing the consumer experience in-store.”
Reflecting this investment, capital expenditure and associated depreciation is expected to increase in the medium-term, with capex peaking at around £16 million in FY19.
Executive Chairman Barry Bown said of all this: “These are undoubtedly challenging times in the retail industry and, in common with many other businesses, Footasylum's trading has continued to be impacted by weak consumer sentiment. On top of that, increased clearance in stores has led to a reduction in gross margin, and we have also had some unforeseen delays in our new store openings and upsizes. However, we have continued our programme of investment, both in upsizing our stores and in our digital capabilities, and are working hard on a number of initiatives to maximise the company's performance during the upcoming peak trading period.
“Despite the challenging outlook, we are encouraged by the continuing progress that we are making in improving our online performance, rolling out our store opening programme, and further enhancing our supplier relationships, and therefore remain confident in the company's long-term prospects."
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