Shares in British fashion retailer Joules Group (LSE: JOUL) fell by as much as 30% on Friday morning (but then recovered to be just over 20% down) after the company warned that profits would be lower than expected this year.
According to management, stock availability issues caused retail sales to fall by 4.5% during the seven weeks to 5 January. This compares with growth of 11.7% during the same period last year.
Joules is not the only retailer to issue a disappointing update this week. However, the company says that its problems were caused by a one-off supply problem with its online sales, not by weaker demand.
If demand continues to remain strong, then it’s possible that Joules could be cheap after today’s drop. In this article I’m going to take a closer look at Joules to see whether the stock might be worth buying.
I’ll also take a look at high street stalwart Marks and Spencer Group (LSE: MKS), whose share price fell yesterday after a disappointing update.
“Demand remains strong”
According to CEO Nick Jones, “demand for the Joules brand and its unique products remains strong”. Mr Jones says that website traffic rose by 8% over the festive period and customer numbers rose. The only problem was that supply issues meant the company couldn’t satisfy online demand.
The company says these one-off issues have been fixed and that it’s taking steps to beef up its logistics operations here in the UK and in the US — overseas sales now generate about 17% of revenue.
A cheap fashion buy?
Today’s update warns that profits for the year ending 26 May are now expected to be significantly below expectations. Based on broker forecasts I can see, I estimate that underlying earnings might now drop to around 13p per share, down from 14.1p last year.
On this basis, Joules stock now trades on about 13.5 times forecast earnings. If the business can return to growth next year, this could be a bargain. But it’s not without risk — problems like this often mark the start of a period of poor performance. I’d consider taking a small position in Joules, but I wouldn’t bet the farm on it.
Is there any hope for M&S?
Marks and Spencer seems to have been in turnaround mode for as long as I can remember. And it’s usually the same story. Food sales are up, clothing and home sales are down.
That’s what happened during the third quarter, which ended on 28 December. Same-store food sales rose by 1.4%, while clothing and home sales fell by 1.7%, on a comparable basis.
These numbers didn’t surprise me. But what did shock me a little was that the group’s online sales of clothing and home items only rose by 1.5%.
Most big retailers are reporting strong online revenue growth, even as store sales fall. For example, Next reported a 15.3% increase in online sales during the final part of last year.
If M&S can’t attract online shoppers, then I think it has a serious problem.
I remain bullish about the outlook for the food division’s move online with Ocado. But I’m starting to think the group’s clothing business may be beyond help. Splitting the business in two is starting to look attractive to me, but could be very difficult and expensive.
I’ll be staying away from M&S stock until things become clearer.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Joules Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020