Moss Bros offers an appealing combination of growth potential and defensiveness. As the latest update shows, its trading strategy is delivering solid gains. Meanwhile, it boasts a cash-rich balance sheet, attractive yield and low beta, all sources of comfort in choppy markets.
Like-for-like (LFL) sales for the first 23 weeks of H216 (2 August 2015 to 9 January 2016) were up 4.2% on the same period last year fuelling total sales growth of 4.8% year on year (y-o-y). Retail sales, comprising 86% of group revenue, were up 3.5% LFL in those 23 weeks. LFL hire sales increased by 9.5%. Gross margins so far in H216 are ahead by 2.8 percentage points y-o-y largely due to an improvement in retail gross margins that benefited from more coordinated and better targeted promotions, particularly around Black Friday, and despite unseasonably warm autumn weather.
The various strands of the company’s strategy all appear to be working well. The refurbishment programme continues to deliver targeted sales uplifts. E-commerce sales increased 32.7% y-o-y in the 49 weeks to 9 January. Moss Bros was late to capitalise on consumers’ shift to online channels but its mobile and tablet sites are now growing strongly. E-commerce sales now comprise 10% of group revenue and there is potential to increase this significantly.
With only three weeks of trading to follow the trading update, FY16 estimates are underpinned. The Office for National Statistics’ November UK labour market data showed employment and average earnings continuing to grow, providing a favourable background against which Moss Bros can further pursue its trading strategy in FY17
The FY17e P/E does not look overly enticing, at first glance. However, it represents a PEG ratio of 1.4x. It also overlooks Moss Bros’s healthy H116 period-end net cash balance of £19m (expected to reduce to c £14m by year-end). FY17e EV/EBITDA is only c 6.4x. The dividend yield is generous by sector standards and the board has committed to a progressive dividend policy. Admittedly, the dividend is not fully covered at this stage, but Moss Bros boasts the cash and reserves positions to support the policy while earnings catch up.