Hello, I’m Emma-Lou Montgomery and with an eye on the company announcements due out in the week ahead we ask why sportswear retailer JD Sports would pay a 77% premium for the shares of a company that has issued a string of profit warnings? Whether Card Factory can survive the double whammy that’s making life so difficult? And whether everything will remain on hold at Nurofen to Dettol giant Reckitt Benckiser until a new CEO is found? It’s all in this week’s Stock Watch Live.
Hello I’m Emma-Lou Montgomery. Welcome to Stock Watch Live.
Now, here’s a question for you.
Why would a retailer that has bucked much of the downward trend on the UK high street and gone on to post a creditable 15% rise in sales, pay a 77% premium to buy a company that has issued a string of profit warnings and seen its share price halve over the past 12 months?
It’s all about complementing the existing business, according to Peter Cowgill, chairman of JD Sports, which has just reached an agreement to take-over Footasylum in a deal worth approximately £90 million.
The deal, at 82.5p a share is at a whopping 77% premium to the shares’ last business day closing price prior to the announcement. And the news that JD had followed up its purchase of an 8.3% stake less than a month later with an offer to buy the whole business, sent Footasylum’s shares soaring by more 75% in a single day’s trading. JD’s share price went the other way - although nowhere near as dramatically.
To many though this is a curious deal. Footasylum has issued a string of profit warnings over the past year — most recently in January — as prolonged discounting has hit margins. By contrast, JD Sports has defied much of the UK retail doom and gloom, reporting that 15% rise in sales over the 48 weeks to January 5, with like-for-like growth of more than 5%.
JD Sports has said the deal, which will let it tap into Footasylum’s slightly older customer base would be complementary to its business and deliver 'significant operational and strategic benefits from a combination of the two businesses.
The acquisition should be completed this month or next. JD has touted cost savings from consolidating Footasylum headquarter operations and removing some of the latter's central corporate and support functions, though insisted that the impact on overall headcount would be 'limited.'
For the financial year ended 24 February 2018, Footasylum generated revenue just shy of £195 million, giving it a profit before tax of £1.9 million.
When JD Sports posts full-year results on Tuesday no doubt investors will want to know that JD, which has an established record of successfully integrating acquisitions, has made a wise decision at a time when other retailers are planning on reducing their numbers on the high street; not increasing them.
Broker Shore Capital says the deal will give JD plenty of new stores which will all benefit its sourcing scale and existing infrastructure. In its view the enlarged group should drive significant operating synergies.
For its part JD has said it intends to 'maintain a separate operational management structure in Footasylum and aims to leverage existing infrastructure and the expertise of both sets of management to deliver a best in class multi-brand and multi-channel consumer experience across the combined group.'
Just ahead of the deal Berenberg repeated its buy investment rating on JD Sports and raised its price target from 530 pence to 570 pence. Credit Suisse rates the shares as outperform investment and raised has a price target of 500 pence on the shares.
One retailer that’s unlikely to be bolstering its high street presence is the ailing card shop chain Card Factory.
A dearth of customers on the high street coupled with a dramatic fall in the number of cards being sent by post and Card Factory, which relies on buoyant activity in both, is having a tough time of it.
Due to post full-year results on Tuesday, this will be a chance for investors to get a clear picture of whether it was right to maintain its guidance for full-year earnings. It did though warn that it was set for another difficult year as like-for-like sales declined following a lower high-street footfall over Christmas.
Expectations for underlying earnings for the full year remain at between £89 million and £91 million. That has been unchanged since November. However, for the 11 months to the end of December, like-for-like sales fell 0.1% from a rise of 3% a year earlier and total revenue was also off the pace - rising just 3.4% compared with a 5.9% rise a year earlier.
The company's Getting Personal division also weighed heavily on performance as it slashed prices in a bid to attract sales and grappled with increasing cost of customer acquisition. And footfall was also down over the all-important festive trading period, which was “challenging” the company said.
Broker Berenberg rates the shares a sell and has cut its price target 5 pence to 145 pence, while Liberum Capital still rates the shares a hold and has cut its price target from 195 to 175 pence.
Having announced a reported a 65% drop in annual profits, consumer goods giant Reckitt Benckiser may find it has some questions to answer when it gives a trading update on Thursday.
The profit fall was put down to one-off gains and expenses. These included a profit in 2017 on sale of the group's food business, tax credits and a charge related to a US Department of Justice investigation. However, underlying earnings rose as the company hit the top end of its sales guidance.
Rakesh Kapoor, Reckitt’s chief executive, who is nearing the end of his eight-year tenure, received total pay for the year of £15.2 million. The rise of nearly 70% compared to his pay in 2018 is largely driven by performance-based bonuses after the group’s performance improved following three tough years. There was that damaging cyber attack and more recently manufacturing problems at its baby formula plant.
Like-for-like sales growth improved to 3% for 2018, after coming to a standstill in 2017. Looking forward, it said it was targeting 3-4% growth in like-for-like revenue in 2019. Operating margins are expected to remain “broadly flat”.
Any news on Mr Kapoor’s successor will be eagerly awaited. During his tenure the share price has doubled. The shares peaked at £81 in June 2017 but the past two years have been marred by a series of setbacks and the shares are now trading just below £65. It’s clear that investors are concerned that big strategic decisions will have to wait until the arrival of the new CEO.
Well that’s all for this week. For more on the companies as they report in the week ahead, go the Markets & Insights section at Fidelity.co.uk
Thanks for watching.