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Footasylum on the back foot as it swings to first half loss amid tough retail market

Footasylum said it would scale back its store expansion programme from 2020 to protect the balance sheet due to lower expectations for profitability in the near term
Footasylum
Trading in 2019 is in line with the reduced guidance provided September

Footasylum PLC (LON:FOOT) shares stepped lower on Tuesday after swinging to a first-half loss due to weaker margins and higher investment costs.

The athleticwear retailer posted an adjusted loss before tax of £4.0mln for the six months to August 25, compared to a pre-tax profit of £2.3mln the same period a year ago.

The gross margin dropped 190 basis points to 42.9% after discounting items in clearance sales as the group contended with the industry-wide challenge of tough competition and dampened consumer confidence. 

Revenue for the period gained 19% to £98.6mln from £83.2mln with growth across all product categories and channels, including online, stores and wholesale.

"This has been a difficult trading period for Footasylum as we have contended with tough conditions on the high street and some delays in our programme of new store openings and upsizes ahead of the peak trading period,” said chief executive Barry Bown.

“While we are pleased to be reporting good top line growth, and a particularly strong year-on-year revenue performance in both online and wholesale, our profitability has been impacted both by a lower overall gross margin from higher clearance activity in stores, as well as the extensive investments that are being made to position the company for future growth.”

READ: Footasylum shares stumble as it cuts 2019 earnings forecast amid tough retail market

Investment costs included store openings and refurbishments, improvements to the website and the relaunching of the mobile app. Footasylum opened one new store during the period and plans to roll out a further five stores and upsize a total of five stores for the year.

Total capital expenditure in the first half came to £4.3mln, up from £3.5mln last year.  Net cash stood at £4.5mln at the end of the period, compared to net debt of £0.7mln the prior year.

Investments expected to support future growth 

 “We are encouraged by the early results and trends that we are seeing from our investments in key areas such as digital and marketing, and see substantial opportunity for further progress across these and other parts of our operations,” said Bown.

“In the longer-term, we remain confident that the company's differentiated, product-led, multi-channel proposition, combined with strong partnerships with core suppliers, will underpin our future progress."

For the 2019 fiscal year, the group expects capital expenditure to reach £16mln and left its forecast for the cash position unchanged. Trading in 2019 is in line with the reduced guidance provided September.

Footaslym to scale back store expansion in 2020

Footasylum said while the UK high street is “undoubtedly a challenging trading environment”, it is confident that targeted new store openings and upsizes, combined with focused investment in the online channel will “materially improve” its brand relationships and enhance the consumer experience.

However, from 2020 the company will scale back its targeted store expansion programme to two new stores and two upsizes per year in order to preserve the balance sheet due to lower expectations for profitability in the near term.  Costs in 2020 will be therefore lower than previously expected.

Shares dropped 5.08% to 30.85p in morning trading. 

Barry Bown 'making a difference', says Liberum

Liberum left its 2019 expectations unchanged but said a lower rate of store openings and upsizes from 2020 along with tighter cost control will lead to modest increases in its future-year forecasts.

"Relationship with brands are already improving with some notable additions, investment in IT, eCommerce, and rewards programmes are driving digital sales and we see the new look store as positive progress," the broker said.

"In short order, Barry Bown is making a difference and while these initiatives will take time to feed through to the numbers, there are some early positive signs after what has been a tough few months for the group."

Retail analyst Nick Bubb said it appears investors were "sold a pup" in the initial public offering a year ago. Following two profit warnings, the share price is "a shadow of its former self" with the market cap down to just £34mln, he said.

"And today’s interims (for the 26 weeks to 25th Aug) make grim reading, with an adjusted loss before tax of £4.0mln, versus a profit of £2.3mln a year ago.

Bubb said there is some reassurance in the news that current trading is in line with the 2019 expectations that were rebased at the time of the trading update in September but shareholders may be concerned about the plans to scale back store expansion from 2020. 

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