News about specialty fashion retailers these days is typically about store closures, increasing competition from international brands and the shift to online. It’s enough to make investors look elsewhere… but then there are the success stories. Witness Lovisa, which generates enviable returns on capital and has been able to replicate its business model in every new geography it has entered.
A basket of ASX-listed fashion retailers is currently priced for close to zero growth, on average. This creates investment opportunities where there is a sound business model and shrewd management. Noni B (ASX code: NBL) is one retailer fitting that description. Since Scott Evans took over as CEO in 2014, gross margins have increased from 60% to 72%. In September 2016, NBL completed the major acquisition of Pretty Things, owner of W. Lane, Rockmans, beme and Table Eight brands. This continues to provide opportunities for operational improvement and cost out. One focus has been achieving a better deal on sourcing garments, assisted by the buying power of a larger group.
Despite a stellar share price run since the loss-making days of 2014, the stock remains priced on a forecast 2019 financial year PE of only 9x and fully-franked dividend yield of 6.7%. The company recently reported like for like sales growth of 3% and a 29% increase in underlying earnings per share. The store network was expanded by 5% in the half year to 642 stores and management has plans for a further 16% increase.
NBL’s results contrast markedly with Specialty Fashion Group (SFH), which owns brands including Millers, Katies and Crossroads. SFH recently reported a like for like sales decline of 3% and earnings per share down 67%. The business is closing 30% of its stores. Many of the SFH brands operate at a price point as low as $15, compared to $50 plus at NBL. This gives the SFH business little room to move on margins when it comes to any cyclical headwinds.
NBL’s target demographic is females over 55 in regional and sub-regional shopping centres. This provides a measure of protection from international retailers and the shift to online, which have had most impact with the younger demographic and in prime locations.
Investors should expect further acquisitions, given a successful track record and net cash position. SFH has been speculated as a potential target, noting that Scott Evans previously ran two of the SFH brands. That acquisition would entail significant execution risk, but the potential for cost out could make it highly accretive.
ASX code: NBL
Share price: $2.51
Industry: Fashion retail
Forecast FY19 Dividend: $0.17 per share, fully franked
Clime Group owns shares in NBL and LOV for and on behalf of various mandates for which it acts as investment manager. Vincent Cook owns shares in NBL and LOV.