Every now and then, Stockhead’s equal second-best editor Christian Edwards gets all twitchy about a stock, sector or staple’s rosy future. Sometimes he even has good reason to, with ‘solid fundamentals’ and everything. Or he just likes the way it catches the sun. Welcome to Christian Values, which is definitely not financial advice.

It’s been a big few days for Best & Less, that rickety old dept store, cum listed concern slash online store slash place you got lost as a baby and still re-live the trauma nightly when deep in REM sleep delivered its maiden full year report as a listed concern late yesterday and it is paying out.

But more of that anon.

The stock listed on the ASX back in July ’21 after a five and a half decade life as a private company, and its shares are still well up from its probably initially conservative $2.16 listing price.

But hell, everything about BST feels conservative to me – and that ain’t such a bad thing when a defensive posture is apparently the way to play these times of inflationary-flavoured uncertainty. Especially if you’re in the consumer retail gig, if not quite living large on the discreet side of selling.

In fact, with CEO Rodney Orrock confirming that Best & Less will be Best but things will now cost more, BST management are almost certainly counting on the truism that in times of rising cash rates and death-by-uncertainty, non-discretionary retail lines are likely to drive an improved performance in the worrying times ahead.

To cope with inflation as it stands, Orrock says BST prices are going on up by as much as 5%.

However, BST’s absolutely non-discretionary categories – like baby clothes and little kids kit-out – will be off limits to maintain the BST value proposition.
 

Them’s fighting words:

“We will absolutely fight for our customer; we know that our customers are after great value at low prices – that is what Best & Less says above the door.” – CEO Rodney Orrock

 

And they need to be fighting words:

Via Allegro, BST and ASX

The release of BST’s FY22 results late on Tuesday have been swiftly followed by the news majority shareholder Allegro Funds has entered into an underwritten block trade agreement with Bell Potter, flogging some 11.1% of its issued shares in BST leaving Allegro with 32.4% BST’s issued stock.

In a letter to BST Allegro said:

The primary purpose of the sell own is to enhance liquidity in BST stock as it is our view that the Allegro Entities’ holding in BST has constrained trading liquidity in the stock. 

Allegro remains highly supportive of BST and its management team and has strong conviction around the ongoing strategy, performance and value of the Company. 

 

Despite the block sale, Allegro is still BST’s largest shareholder and intends to continue to maintain its representation on the Board of Directors.

 

Totally non-discretionary

Founded back in 1965 and – for a long part of my life anyway – apparently cryogenically frozen in 1965, Best & Less is that very store which your mum would’ve dragged you screaming through at some stage. I myself was dragged through screaming like a banshee on acid just last week and mum, no less lovely but significantly less patient, was not impressed.

For the uninitiated – BST is now a smouldering small cap, an awesome, fairly cut price apparel specialty retailer doing its thing as it has done for many, many, many moons around Australia and New Zealand.

There’s (I kid you not), circa 250 physical stores and an online platform across its two brands, such as Best&Less in Australia and Postie in New Zealand.

Best&Less reckons its target customers (are totally Target’s customers), “the 18 to 54 year-old women” with a bunch of wee grommets in tow.

In Kiwi-land the Postie online business, targets ‘value-conscious families’ buying baby all-black, terrifying toddler and other kid’s stuff.

With a product portfolio which spans the vast breadth of economically priced women’s and men’s kit, underwear, grundies, knickers, budgie-smugglers, shoes, pjs, more undies, “lifestyle”, heaps of thermals, and “other essentials”; this, you’d reckon, is an all-weather business if it’s not run like Kogan.

 

BST in FY22 The numbers:*

● Statutory net profit after tax (NPAT) (before some complex pro forma accounting shennanigans) was $36.1 million (down 55.5%)
● Pro forma NPAT (TBH I’m not sure how they got this one) was $41.1 million was (down 12.6%)
● Total sales rev of $622.2 million (down 6.2%)
● Pro forma revenue $622.181m (again… IDK up 8%)
● Gross profit of $301.1 million; (down 5.9%)
● Online sales up 15.6% yoy
● Net cash of $36.7 million as at 3 July 2022

 

Via BST

 

The hand of god

Basically FY22 was still hitting BST with a decently sized COVID-19 stick and a few Acts of God.

With circa two-fitty stores about the place there was widespread store closures during 1H in particular, a heap of customer uncertainty and then you had the floods whacking Lismore and other places in Q3 which one could say negatively impacted foot traffic, but would be better saying something like turned foot traffic into swim school.

So frankly, sales revenue for the 53 weeks of business at $622.2 million (-6.2% on pcp) was a pretty good effort considering BST lost almost 11% of the years trading days to the above mentioned probs.

I don’t need to add this chart for visuals, but I kinda like how the Q1 FY22 is ludicrously tall:

 

Via BST

 

What the broker says:

Like for Like sales growth after adjusting for closed stores was -0.7% on the previous period, and as retail trading conditions normalised a bit, LFL sales were +6.4% pcp, in Q4.

The brokers at Macquarie say the result beat their expectations by 1.9%, which I’m sure BST will take as a win, with Macquarie highlighting online sales grew by 15.6% (FY21: 33.5%) on pcp, and now represent 11.3% (FY21: 9.2%) of total sales.

Sales were backed by an improved gross margin which delivered a 20bps increase compared to the pcp.

No guidance was offered – citing the usual macro uncertainty, but Macquarie also notes that management is confident high inflation is a positive for  low-end value stores like BST, and the broker notes FY23 will cycle through the lockdowns.

The broker however, is still concerned over the spending capacity of low-income earners, like small cap investors and journalists, retaining a Neutral rating for BST, while lifting the target price to $2.50 from $2.40.

Macquarie forecasts a full year FY23 dividend of 23 cents and Earnings Per Share of 33.4 cents as well as a full year FY24 dividend of 26  cents and EPS of 37.20 cents.

 

Inventively not Kogan

Rodney Orrock, reckons these numbers are a thumbs up for the group’s “good, better, best” sales strategy. And if you’d gone and named a sales strategy then you’d likewise be saying it kicked butt.

Certainly, and here’s a key lesson for Ruslan Kogan, BST improving the hell out of its inventory efficiencies which Mr Orrick says “reflects the benefits of lower cost of goods sold through an effective foreign currency hedging strategy.”

BST says 75% of its orders were executed on contract rates significantly lower than spot rates, at a time when spot rate freight contnues to go nuts.

The company made a point of nncreasing lead times to protect against shipping disruption, while inventory of $95 million at end FY22 includes $19.1 million new stock on water to ensure availability ahead of BST’s key summer selling period

Orrock said the company’s ‘Clear-as-you-go’ approach maintains aged inventory at low levels while disciplined promotions managed to clear any seasonal stock gluts.

 

Looking ahead

First up, net cash: BST is holding some $36.7 million and are backed by some undrawn working capital facilities of $40 million here and $NZ5.5 million in Kiwi-land.

Capex increased by 51% due to the opening of six new stores, 17 refurbishments and four relocations.

The company also sees that increasing in FY23 with 11 new stores pegged for opening, more refurbishments scheduled, as well as a new POS rollout and further systems upgrades.

Early trading over the first few weeks if the new financial year has already delivered improved business, with total sales up 38% for the first eight weeks of FY23 and LFL sales up 1.4%

As mentioned, there’s no guidance but there is a consumer website relaunch, and an unnervingly titled mobile app 2.0 while online sales are expected to moderate as customers leave their ipads and return to stores.

Most of all is a sense that BST is sitting pretty in an inflationary environment.

The company is best and breathlessly expecting an acceleration of retail migration to value, while its strong position in the non-discretionary space and its ‘unique value proposition’ will continue to drive sales.

“We know that there is price sensitivity across a number of different product lines that we sell, and that they (shoppers) expect us to hold those prices and we‘ve done that for a good 30 years without showing any inflation with our prices,” Orrock says.

 

Finally, the best till last:

There’s totally a final dividend of 12¢ per share fully franked, due to pay out the 16th of September, which takes the FY22 dividend to 23¢ a pop and represents a fully franked dividend yield of 8.8% and 79.8% payout ratio (but against the statutory numbers, which would be heaps less, not best than the pro forma when considering both yield and ratio. sigh.).

 

*Like a lot of other retailers, BST bases its financial year on a retail calendar, with the FY reporting period ending on the Sunday closest to 30 June. That can work out mean the occasional 53-week reporting period rather than the usual 52-week period.

FY22 was a 53-week period (while FY21 was 52-weeks – just sayin’ because the positive impact on BST’s reported Net Profit after Tax (NPAT) for this year was circa $1.6 million, reflecting the net of additional Gross Profit via Week 53 sales of $11.5 million.