A brief analysis on Jumbo SA (General Retailer)

Ticker:                   BELA:GA

Index:                     ASE General Index

HELMSI (Hellenic Mid&Small Cap)

GT30P

Price:                     €  11.57

52-week Low:      € 7.39

52-week High:      € 14.4

Mkt Cap:                € 136m

Performance (%)                1m          3m          12m

ASOS shares                         -1.95       +0.7        +46.2

Athens Index                        +1.41      1.69        +43.7     

Business Description

Sector: General Retailers

Jumbo SA is a Greece-based company that is engaged in the retail trade industry. The Company's main activity is the retail sale of toys, baby products, seasonal items, decoration items, books and stationery. Jumbo SA is also active in the wholesale trade of toys and similar products to third parties. The Company’s network consists of 67 stores situated in Greece, Cyprus, Bulgaria and Romania.

The Success Story

The company started operating in 1986 as a toy store in Athens, Greece. It started to gradually expanding its product offering since then. Nowadays Jumbo offers both branded and non-branded products at low prices by maintaining high margins. Products include toys, baby care items, stationary, seasonal products, decoration and various home objects. A key element in company’s success is its marketing strategy and the strong brand recognition achieved through numerous successful (TV and radio) commercials. It’s worth mentioning that Jumbo is considered the place where someone can buy all kinds of products on the cheap.

Q3 2013/14 Results (Ending on March 2014)

Jumbo has recently announced its results for the third quarter (1/1/2014 – 31/3/2014). Sales were up 9% in this quarter while the 9M sales were up 7.6%.  For the 9-month period, sales grew 2.91% in Greece, 20.6% in Cyprus, 19.6% in Bulgaria while sales in Romania (stores in Romania started operating this fiscal year) were €6.5m. While management had expected sales for 2014 to grow 2-4%, after the strong results of 1st quarter, it has raised its target to +4-6%. However, it seems that sales will exceed even the revised projections and will grow at a rate of 7.9%.

Adjusted net profits (for the 9-month) fell by 3% yoy to €69.5m mainly due to the higher tax expense. Specifically jumbo announced 6.7% growth on Net Profits in Greece, 22.5% in Cyprus and 45% in Bulgaria.

Jumbo has also managed to reduce operating expenses (as % of sales) over the last 3 years by reducing the average number of employees per store by 11%. The company offers strong liquidity with cash and cash equivalents summing to €144m excluding blocked deposits.

Stock & Valuation

We cross check Jumbo’s valuation metrics against Developed and Emerging market peers in the following table. The recent MSCI reclassification demands that we consider emerging market names in the peer group even if Jumbo does not have similar growth profile. Unfortunately Jumbo does not have any direct peers and conclusions are vulnerable to many factors. Companies operating in the retail sector are chosen as peers. Furthermore, the Greek stock market has been reclassified from the MSCI as an emerging market. As a result we compare the performance of jumbo to both European as well as non-European retailers. We use an average value of developed and emerging markets as a benchmark because jumbo does offer neither the stability of (developed) European companies nor the high growth rates of (Emerging) non-European companies.

The valuation of Jumbo is performed based on the average of DCF, price and enterprise multiples-based fair values.

The 12 month estimated Value of jumbo is €12.61.

Valuation based on historical P/E

We use each year’s average price and recurring EPS to find the historical P/E value for each year from 2004-2013 (results can be found on the table below). The historic P/E of jumbo (average for the years 2004-2013) is 10.15. This makes the share to look quite expensive relative to past values. The current price represents a 43% premium to the “fair” value.

Valuation based on comparables

Jumbo trades at 9.71% discount to the average of the peer group as a result of the lower EPS growth rates (compared to peers).  The benchmark P/E is calculated as the average of the Eurostoxx Retail P/E and the Emerging Markets’ Retail P/E.

DCF Model

The estimated value of Jumbo stock is €12.41 based on a 14 year Discounted FCF model. In our point of view, sales growth rates in Greece will start recovering as the country returns to positive growth rates and unemployment falls. The stores’ network expansion in Romania will definitely contribute to the Jumbo’s sales growth in the region. Specifically, over the next 6 years we expect sales to grow at a CARG of 4% in the Greece, 6% in the Cyprus, 10.5% in Bulgaria and 56.5% in Romania.

Cyprus Operations

Because of its solid balance sheet, Jumbo has found it easy to absorb the impairment of its uninsured deposits in Cyprus which had a negative impact on 2013 profits equal to €24m. The company has managed to increase sales by 12% (in 2013) and 20.6% (for the 9month period) in the country although the economy and consumer spending are declining.

Greece and Romania

Greek economy is still depressed but this does not seem to impede jumbo from experiencing higher sales and profitability in the region. The slow and stable network expansion along with the low price policy constitute a good strategy of the management. Also, Greek economy is expected to turn to positive growth rates and lower unemployment in 2014. The strong profitability and cash flow generation from Greece will be adequate to facilitate penetration in Romania. Romania in turn, is expected contribute a lot to the group’s revenues and profits by the end of the decade as (approximately) 18 stores are expected to open till 2020.

Network outlook

Jumbo has 67 stores, 53 in Greece, 4 in Cyprus, 8 in Bulgaria and 2 in Romania while it has signed franchise agreement for 2 stores in Albania and 2 in FYROM. The 2 stores in Romania, 1 in Cyprus and 2 in Greece started their operation during the first quarter. The network is expected to reach 60-62 stores in Greece& Cyprus and 18 stores in Romania.  In 2013 the group has also launched its online store “e-jumbo”.

Geographical Sales Split (Current and Expected)

Jumbo sales are concentrated in mainly in one country: Greece. As of the end of 2013 fiscal year, Greek sales constitutes 82% while sales in Greece and Cyprus combined represent the 93% of the group’s total sales. However the scene seems to be changing as the company expands in Europe. By 2020 Greek sales are expected to represent only a 64% while sales in Romania will approach 16% of total sales. Revenue in Bulgaria also seem to grow at faster rates and we expect the Bulgaria to have a 9% share in total sales. 

*Word and Excel files are available on request. 

**The information contained in this post as well as any information within this website is intended for informational purposes only. This is not a recommendation, offer or solicitation to purchase or sell any stock or other securities.

Q3 2014 Review ASOS Plc

ASOS plc

International Demand Pressures

Ticker:                   ASC:LN

Index:                     FTSE AIM All-Share

FTSE AIM 100

FTSE AIM UK 50

FTSE AIM All-Share - Retail

Price:                     £ 28.32

52-week Low:      £ 29.59

52-week High:      £ 71.95

Mkt Cap:                £ 2,354m

Free Float (%):    63%

Performance (%)                1m          3m          12m

ASOS shares                         -32          -43          -27

FTSE AIM 100                      -1            +2.8        +11

Q3 2013/14 Results (Ending on May 2013)

ASOS recently announced its Q3 results with total retail sales up 25% y-o-y. International sales were lower than expected (£151.1m) while UK sales rose an impressive 43%.

ASOS has seen its retail sales rising 25% y-o-y to £243m, with international retail sales up 17% consisting 62% of total retail sales. In addition, capital expenditures are expected to be £68m for the current financial year (in line with previous guidance). Although sales and margins were well pressured this quarter, all customer metric in each territory were positive (with Australia being the only exception). ASOS managed to increase active customers by 32% to 8.6m at the end of May 2014, the items per basket and the frequency of purchases.

Gross margin was down 370bps on prior year mainly because of the shift from international to UK sales (with the later offering lower gross margins), promotions and clearance activity.

The slower growth in sales along with a rise in inventory (+30%) clearly indicates that the demands has been much lower. We expect that this will influence the profitability in the short term. However, the Sterling continuous strengthening had a huge impact on the international sales growth and margins. Thus, as zonal pricing is implemented, we expect that benefits will start flowing back, resulting in higher future margins.

Stock & Valuation

Q3 trading statement released on 5^th June drove ASOS stock price down to £31.2 due to lower  than estimated EBIT margin, sales growth (especially non-UK), losses in China and currency movements.

The estimated value of ASOS stock is £40.8 based on a 14 year Discounted FCF model.  The reduction in the estimated value is mainly influenced by the lower international sales estimates and higher CAPEX.

In our point of view, sales growth rates in UK will start declining from next year but we are very optimistic for sales growth in the rest territories for the following years, when zonal pricing is launched. Specifically, over the next 6 years we expect sales to grow at a CARG of 15% in the UK, 25% in the EU and 23% in US. The Rest of the World segment sales are expected to grow at a CARG of 21%.

*Word and Excel files are available on request. 

**The information contained in this post as well as any information within this website is intended for informational purposes only. This is not a recommendation, offer or solicitation to purchase or sell any stock or other securities.

A brief analysis on ASOS Plc

ASOS plc

17/04/2014

Ticker:                  ASC:LN

Index:                   FTSE AIM All-Share

       FTSE AIM 100

       FTSE AIM UK 50

       FTSE AIM All-Share - Retail

Price:                     £ 43.40

52-week Low:      29.59

52-week High:     71.95

Mkt Cap:                £ 3,607.66m

Free Float (%):    63%

Performance (%)                    1m             3m             12m

ASOS shares                               -21            -25            +58

FTSE AIM 100                            -7               -9.5           13                                 

Business Description

Sector: Apparel Retailers

ASOS (which stands for As Seen on Screen) is a global online fashion and beauty retailer selling over 75,000 branded and own label products. ASOS is specialising in discount celebrity-style fashions and it has seen incredible growth rates the last few years. They differentiate their services by offering free shipping to all customers in over 241 countries.

The Success Story

ASOS has succeeded in providing “fast fashion” product achieving high growth rates. The company benefits from being online only apparel retailer as it has no store leases, enabling it to operate and compete even with very low operating profit margins. As the company has no stores, it is focusing on providing a better on-line experience and fast delivery by investing in IT infrastructure and logistics. In addition, as the company targets 20-something customers, a group that is generally budget constrained, it has committed to low prices and faster return processing. These developments will undoubtedly contribute to the success of ASOS on becoming the “No 1 Online Fashion Destination for 20 Somethings Globally”.

H1 2013/14 Results (Ending on Feb 2013)

ASOS recently announced its first-half results with total retail sales up 34%, in line with analysts’ estimates. However, the UK and RoW sales were lower than expected while EU and US sales exceeded analysts’ expectations. We expect UK sales to grow at lower rates and be influenced by pricing policy, delivery services offered and a broader offer of brands (New Look and River Island recently added). The improvement in the IT infrastructure especially the optimization of the mobile and tablet apps is expected to play an important role in the future customer attraction as mobile/tablet traffic was 37% and it’s growing with accelerated rates.

Management guidance for EBIT this FY is 5m lower than the previous estimate mainly because of £3m extra losses in China and £4-6m losses resulting from the “Euro-hub” in Germany.

ASOS has seen its retail sales rising 34% y-o-y to £472m, a figure that is crucial for the management to achieve its target of £1 billion sales by the end of this financial year (a year earlier than the management’s guidance). More importantly, international retail sales rose 35% consisting 61% of total retail sales.

The balance sheet remains in good shape with no debt and cash reserves of £36.9m on 28^th February 2014. In addition, capital expenditures are expected to be £68m for the current financial year (Previous estimate: £55m).

ASOS managed to increase active customers by 36% to 8.2m at the end of Feb 2014. There are 9 local language websites: UK, US, France, Germany, Spain, Italy Australia and recently launched local websites in Russian and Chinese. It seems that local websites contribute in the growth of sales as in countries such as Germany, Italy, France and Spain revenue growth surpasses 50%.

The management is still positive for this year’s outlook and is expecting the recent developments to bring high growth rates in. There seems to be a significant improvement in operational efficiency across all countries:

·        US warehouse will result in 5% cost savings.

·        Delivery speed is continuously improving in all segments.

·        UK warehouse automatizaton will result in a productivity loop picking from 75 to 250 items per hour.

Having delivery times improved and country specific websites launched, ASOS has to offer a very promising sales growth in the future. 

Cash Flows

ASOS is proving its ability to generate cash from operations by showing a £182,000 in net cash generated from operating activities (before exceptional items). Cash outflows from investing activities are expected to be higher this year (£34m for the first half) due to the investment in IT and logistics and the expansion in China and Germany.

Recent and future developments

As ASOS is still at its early growth phase and sales are expected to reach £1B by the end of this year, the warehouse capacity is starting hitting its limits. As the company expands, we expect certain developments to result in increased efficiencies and cost savings:

·        Mechanised dispatch and picking solution in UK warehouse which will result in picking from 70 to 250 items per hour. With picking representing 50% of the warehouse cost, this development is expected to bring significant cost savings in the near future.

·        New warehouse in China and Europe (Berlin, Germany).

·        Option to extend the current warehouses in Germany and US.

·        US warehouse already processing US returns and building stock is the next target which will lead to significant cost reductions.

·        Zonal Pricing (expected to be effective by the end of this FY) will undoubtedly allow ASOS to compete more effectively globally and probably will enable ASOS to negotiate better prices with its suppliers.   

·        Introduction of ASOS Fit may result in significant reduction of returns.

·        Possible medium/long term expansion in attractive markets where online apparel growth is very promising (Japan, South Korea, Middle East, India and Brazil).

Stock & Valuation

Q2 trading statement released on 17^th March drove ASOS stock price down to £43.4 (-31% for the period March 17^th – April 15^th). This is mainly due to the lower than expected UK and RoW sales growth, the lower profitability as well as the new higher guidance for this year’s capital expenditures (68m from 55m because of losses in China and the development of a European warehouse in Germany).

The estimated value of ASOS stock is £52 based on a 14 year Discounted FCF model. In our point of view, sales growth rates in UK will start declining from this year but we are very optimistic for sales growth in the rest territories for the following years. Specifically, over the next 6 years we expect sales to grow at a CARG of 11% in the UK, 26% in the EU and 32% in US. The Rest of the World segment sales are expected to grow at a CARG of 38%.

Geographical Sales Split (Current and Expected): Time for US and RoW

As it has already been mentioned ASOS has seen “huge” sales growth the recent years which are expected to reach £1b by the end of this FY. Thereafter, retail sales are expected to climb £2b by 2017 and £3b in 2019. Home market (UK) was the reason ASOS managed to achieve those rates until 2009 when UK sales accounted for 72% of total. However, the scene seems to change dramatically with RoW sales expected to represent 42% (30% in 2013)  and EU and US sales to gain just some more ground by 2019 (26% and 13% respectively).

Competition

The competition that ASOS faces is quite intense. ASOS is competing with many international companies as well as domestic retailers in each country that it operates. The main competitors of ASOS are NEXT plc, New Look Retail Group Ltd, Arcadia Group ltd, Ebay, Amazon, JP Boden&co, M&S, Riverisland.com.

Consumer Satisfaction

In an analysis of the factors influencing consumer satisfaction conducted by comscore, online shoppers satisfaction is influenced mainly from the free/discounted shipping, the ease of returns/exchanges, the variety of brands/products, the availability of live customer service and a clear returns policy.

ASOS as a purely online fashion retailer focuses on providing services that meet clients’ needs listed above. This could be seen as differentiation of the products and services that ASOS offers and helps the company develop a competitive advantage and pushing profit margins higher.  

Threats / Risks

Growing competition: The retail industry is a highly competitive market especially for those companies that operate online.

Tax issues: The risk that governments in which the company operates will impose online sales tax is still there. 

European economic climate: The debt crisis and the continuous cuts in government spending across the European countries can influence the economic climate in Europe and cause buyers to cut back on overall spending as well as clothing purchases.

Ukraine crisis & Russia: Ukraine crisis and the relationships of EU with Russia may have an impact on ASOS performance in the region. However the sales in Russia represent only 2% of total sales so we would not expect any significant influence.

Exchange rates volatility: Exchange rate movements can impact sales in all regions (except for UK).

Segment Analysis

A valuable indicator of ASOS success across countries is the ranking of the company’s website based on the monthly visits from individuals aged between 15 and 34 years old in the retail apparel category.  ASOS holds the first place in UK and Australia while it is in the top 10 in US France, Germany, Spain, Italy and Russia. In addition the performance, according to these rankings, is spectacular in Germany (from 11^th in 2013 to 4^th in 2014), Russia (from 16^th to 6^th) and China (from 70^th to 27^th).

UK: H1 sales rose 32% y-o-y (21% for Q2) representing 39% of total sales. The performance in UK has been a result of various factors:

·        Lower prices.

·        Introduction of new brands such as River Island and New Look.

·        Lunch of android app.

·        Visits in online retail sites during “Cyber Monday”, “Christmas” and “Boxing day” hit new records.

·        ASOS mobile website in the UK’s most visited mobile retail sites (8^th).

·        Desktop Website comes 7^th in UK. 1^st among apparel retailers

·        Premium Membership offer

·        Reduction in delivery time

Although there is still room for growth in the UK, we do not think that sales growth will remain within the current rates. The continuous operational efficiency and the investment in customer offer will maintain the current customers but as UK becomes more mature market for ASOS, the attraction of new customers looks more challenging.

US sales growth has been better than expected (31%) and constitute almost 10% of total sales. US seem to be one of the most promising markets in which ASOS operates as the online apparel retail market size is the highest in the world (approx. $35B). ASOS managed to exceed expectations regarding the US sales although the zonal pricing has not been introduced yet. The new US warehouse in Columbus, Ohio (currently 200,000 sq. m) is already fulfilling orders from returns stock and is expected to freight stock in the next few months. The order processing from the US warehouse will probably lead to 5% cost saving as well as the improvement in delivery speed. The management suggested the result from cost savings will be spent in digital marketing. Zonal pricing which will be introduced later this spring, will probably lead to accelerated growth in US as ASOS is not able to effectively compete at the moment (especially for 3^rd party brands) but we also believe that this movement may lead to lower gross profit margins in the medium term unless the company can negotiate to buy US branded products locally.

EU has also taken us by surprise as the H1 sales in the region grew 65% y-o-y.  The management highlighted 4 key countries: Germany, France, Italy and Spain all of which have shown more than 50% growth in sales. It seems that results are impressive for the countries where local websites and local marketing strategy has been introduced. We believe that there is notable chance for ASOS to win ground in the EU the next few years. Furthermore, we expect EU to play an important role in the group’s sales growth when the new euro-hub in Germany reaches its full potential.

RoW sales in Q2 grew only 3% (£33m), mainly due to unfavourable currency rate movements, and 14% in H1 (£116m). A weaker local currency has as a result ASOS products to appear more expensive and adversely affecting sales.

Australian dollar depreciation against GBP (- 8% the six months to 28 Feb) and local macroeconomic factors had a negative effect on sales growth in the country. ASOS has strong presence in Australia, being number 1 apparel retailer in terms of traffic for 15-34 years old. The Australian sales account for 41% of ASOS RoW sales.  The management noted that Russia did not perform as expected in Q2 due to Russian ruble depreciation (-14% for the six months to Feb 28^th). We believe that the recent Ukraine crisis results in high political risk for ASOS Russian operations. However, Russian sales account just for 2% of total sales, so any adverse scenario will have limited impact on ASOS fundamentals.

China: Unfortunately, the management declines to provide information regarding sales in China. In our point of view China has a lot to offer to ASOS as the online apparel retail market size is the second highest in the world (approx. $18B) and is expected to grow at quite high rates the next few years. It’s worth mentioning that the management suggested that operating losses in China will reach £9m this year (£6m previous guidance) and up to £18m over the next 3 years.

 **The information contained in this post as well as any information within this website is intended for informational purposes only. This is not a recommendation, offer or solicitation to purchase or sell any stock or other securities.

Europe’s Banking Union

Interesting! After years of bailouts in unconscious risk-takers there is a chance of "Huge change". Will this lead to a split of "universal banks" to what they used to be in the past?

The talks for a European Banking Union have started a few months ago. The alternative "Bail-in" strategy has been tested on Cyprus leading a healthy economy in recession.
Will depositors continue to keep their money in "Universal" banks or this movement will result in the split of banks according to their operations' nature?

Bloomberg Article:
Europe’s Banking Union
Breaking Out of the Vicious Circle
http://www.bloomberg.com/quicktake/europes-banking-union/

Financial crisis of 2007-2008: A psychological perspective.

The financial crisis of 2007-2008 had severe impacts on both financial markets as well as the real economy. Thus, an explanation of the reasons that caused this crisis is of great importance. Behavioural finance is a field that can provide as with insightful information regarding the psychological reasoning behind the behaviour of agents of the economy.

The creation of a bubble or the overvaluation of an asset can be explained by theories based on investor beliefs or investor preferences. Regarding the investor beliefs, there are three theories:

1. 1.     Assets are becoming overvalued because there is a big divergence between the bullish and bearish investors and there are short-sale constraints.
2. 2.     Assets are becoming overvalued because people are overconfident and overestimate the reliability of their analysis.
3. 3.     Representative heuristic: Bubbles are formulated because of the tendency investors have to extrapolate past outcomes too far into the future. According to this heuristic, investors make inferences for the population having analysed only a small sample of data.

In addition, there are two theories from the investor preferences perspective:

1. 1.     A bubble is created because investors that experienced gains on an asset become less risk averse; any future losses will be covered by the prior gains.
2. 2.     Bubbles in new technology stocks are more likely to occur because the human brain overweights low probabilities.

The recent real estate bubble is more likely to be explained by the representative heuristic approach. This is because home buyers based their decision to buy a new house on past returns of the real estate market. This has found people buying overvalued houses with high “loan-to-value” ratios.

However households’ over-extrapolation is only one part of the story. One could argue that the over-supply of credit, in the form of sub-prime loans, to home buyers has also contributed in the formation of the housing bubble. This oversupply of credit has been the effect of the over-extrapolation on behalf of rating agencies’ analysts. As analysts were trying to convince themselves that house prices will continue to rise, they were giving AAA rating to sub-prime securities implying that the risk involved in those securities was minimal. This was greatly appreciated by investors who were fascinated about those securities. This practise led to easy access to credit which as we have already mentioned, pushed the real estate prices up.

Furthermore, the huge amounts of sub-prime loans and securities held by banks had as a consequence, the real estate bubble influencing not just individual investors but also the whole banking system. But why had banks been holding large amounts of those securities?

Banks may had held those securities for two reasons: either because they were doing the securitisation and they had to hold them until the process was over and/or these securities were offering a high return so why shouldn't they benefit from holding such securities? Nevertheless, the risk that those securities contained has not been taken into consideration.

The answer is simple; they could hold such securities for operational or speculative reasons but what about the risk they were exposed? Three explanations are being provided: The banks had large positions in sub-prime securities because of “bad incentives”, using “bad models” or simply “bad luck”.

Of course it is difficult to believe that banks base their decisions on luck or that they use bad models. But even the bad incentives approach does not seem to be plausible. This is because of the basic idea that people do not care about money but they also want to feel good about themselves.

An alternative hypothesis is that traders on mortgage desks were little aware of the risks and they manipulated their beliefs so that they think their actions were not posing anyone in risk. From a psychological perspective people manipulated their beliefs when their positive self-image is threatened.

The reason that real estate bubble drifted the prices of other risky assets classes down is more straight-forward. One explanation is that banks were holding sub-prime securities which have been declining in value and they had to sell other securities to meet margin requirements and deleverage, forcing the prices of other risky assets down.

The psychological view is related to loss and ambiguity aversion. There was an increase in both loss and ambiguity aversion for investors who experienced losses from their risky asset holdings, which drove the prices of those assets even lower. Investors found themselves in a situation where they were thinking they are less competent which led to increases in their ambiguity aversion.