Tom Tailor is a mid-market fashion retailer undergoing a radical restructuring. A new management team is attempting to turn around a loss-making company that expanded too aggressively and lost sight of its brand values. The newfound focus on profitability is welcome and recent Q3 results show an acceleration in cash generation as well as better than expected EBIT growth.
Written by
Richard Jones
Tom Tailor |
Cutting it
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Consumer |
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23 November 2017 |
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Tom Tailor is a mid-market fashion retailer undergoing a radical restructuring. A new management team is attempting to turn around a loss-making company that expanded too aggressively and lost sight of its brand values. The newfound focus on profitability is welcome and recent Q3 results show an acceleration in cash generation as well as better than expected EBIT growth.
A year of transition
The company’s new management team has embarked on a new strategy, known as the “Reset” initiative, with renewed focus on sustainable profitability. As well as closing a significant number of stores (over 150 across the company’s two brands), management has exited from several overseas markets (eg South Africa and China), closed underperforming sub brands (eg Tom Tailor Polo and Bonita Men), reduced SKUs across the business and acted to improve operational efficiency.
Strategically sound
This period of retraction clearly means a decline in sales, but the strategy makes sense and investors should see beyond a shrinking top line – a task that is made more palatable when the company can show improved profitability as it has done in its Q3 results, with EBIT up more than expected at €14.4m representing an EBIT margin of 6%. A recent capital increase (well supported and raising €61m) should support badly need investment in e-commerce (just 5% of sales currently) as well as other IT related projects and new store format development. It has also helped to improve the equity ratio from 23% to 30%. Management will need to demonstrate continued progress beyond the “easy win” stage (closing loss-making stores has an immediate positive impact on group EBIT) and that its brands can outperform in a challenging segment of the market. A capsule collection designed by Naomi Campbell is a positive step in generating Tom Tailor brand momentum.
Valuation
As this is a restructuring story, investors must have a degree of confidence in future forecasts to buy into the stock (especially given that the shares have performed well since the capital increase). Positive Q3 results will have helped sentiment and have pushed consensus forecasts up slightly. Nevertheless, consensus forecasts still look reasonable and on that basis the shares do not look particularly expensive on a 2018 P/E basis and suggest only limited turnaround potential is priced in. The company has confirmed that it is unlikely to resume dividend payments before 2022, a sensible policy in our view given the extent of the restructuring.
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Consensus estimates
Source: Company reports, Bloomberg consensus estimates |
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Disclaimer
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Disclaimer
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Martin Currie Asia Unconstrained Trust (MCP) aims to generate returns at least in-line with Asia ex-Japan nominal GDP growth. It follows a bottom-up approach to stock-picking and uses detailed ‘forensic accounting’ assessments to build a high-conviction portfolio of 20 to 30 stocks, with a long-term view. The trust has persistently traded at a deep discount, but there is scope for this to narrow following a recent change in the dividend policy, which has lifted its yield to 4.0%, while maintaining the investment strategy. MCP’s yield now compares favourably against peers and could attract new interest from income focused investors.