Why investors are forgiving Alexon for Dolcis and Bay Trading
Posted on June 8, 2009 by Richard Beddard
Filed Under Companies |
In practice:
When diworseification pays
I don’t usually find inspiration for good companies at cheap prices in Money Observer’s tables of highest risers, and biggest fallers. The tumultuous price movements of the shares are often indicative of rampant speculation, and not the kind of dull but worthy companies I favour.
Nevertheless, Alexon (AXN), a ladies’ clothing retailer, is at a critical point, and judging by the doubling, and redoubling of its share price before and after its full year results in April, investors are betting on its continued survival.
The first doubling, from around 15p to 30p may have been due to takeover speculation.
The redoubling happened after the company learned that a credit insurer, Euler Hermes, had ceased covering its suppliers, should Alexon be unable to pay them. Apparently guided by Alexon’s auditor, which drew attention to its loss-making Bay Trading stores in the preliminary results on April 22, Euler Hermes feared Bay Trading might drag the whole group down, leaving it to pick up the tab for Alexon’s creditors.
Without credit insurance, suppliers might limit Alexon’s credit, or demand cash up front - cash that Alexon would have to divert from its other six brands. Since that, along with the cost of returning Bay Trading to profitability, might put the rest of the company at risk, Alexon put Bay Trading, a separate limited company, into administration.
That is, judging by the share price, good news. Investors must believe that the company is better off without Bay Trading, though management presumably didn’t think so. Alexon, whose creditors remain uninsured, had embarked on a recovery plan.
Alexon shares are still cheap at less than three times average earnings over the last ten years, but can it really be a good company? I mean, financially sound, and in a business that will remain profitable.
Over the last few years that’s looked increasingly doubtful. Alexon diversified into menswear and shoes in 1999, through Style Menswear and Dolcis, but sold them off having failed to turn them into consistently profitable businesses. Both subsequently went bust. It decided to hang on to Bay Trading, it’s ‘value’ brand - also bought in 1999, but the consequence was the same.
In the last four years its write offs have reduced shareholders’ equity, the accounting value of the company after having allowed for its debts and other liabilities, from over £100m to under £5m, or just 7% of total assets.
In practice, shareholders don’t own much, if anything, beyond a share in the potential of Alexon to make profits in future, should it have one.
This is, I think, where the story could turn from horror to redemption. Alexon is now left with five home-grown brands, Dash, Ann Harvey, Kaliko, Minuet Petite, and Alex & Co along with the original brand, Eastex, which it acquired as long ago as 1947.
Each brand sells ladies’ clothes to a fairly well defined niche, Ann Harvey to ladies with a ‘large silhouette’, Minuet Petite to the petite, and Eastex, for affluent mature women. Since my wife doesn’t fit into any of those categories, I asked her about its more youthful and mainstream brands, Kaliko and Dash, and drew a blank. She’d heard of Dash, but then, so had I!
Excluding a hefty loss as it wrote-off its investment in Bay Trading, and even heftier provisions against future losses on unproductive, or onerous, leases, Alexon was profitable to 31 January 2009 according to its recent annual report. On the surface it was financially strong too, with no long-term debt and positive cash flow exceeding its profits. It scores seven out of nine on Piotroski’s F_Score, which is reassuring.
According to it’s own projections made after the withdrawal of credit insurance, it should be able to continue as a going concern.
I’m wondering if Alexon is a classic case of diworseification, as defined by the legendary fund manager Peter Lynch. Instead of raising dividends, he said profitable companies often prefer to blow the money on foolish acquisitions, only to regret it later. His advice (from One up on Wall Street):
From an investor’s point of view, the only two good things about diworseification are owning shares in the company that’s being acquired, or in finding turnaround opportunities among the victims of diworseification that have decided to restructure.
Alexon looks like it’s a victim of its own ambition, but not necessarily current managements’. Chairman Richard Handover joined in March 2008, and chief executive, Jane McNally joined in June last year. Of all the directors, only Robin Piggott, the finance director remains from Alexon’s expansive days.
But Alexon’s sales are falling, and last time I followed a situation like this, when credit insurers removed cover on SCS, an apparently profitable sofa-seller, and it raced to bolster collapsing sales before it ran out of cash, shareholders lost everything. Alexon has the buffer of a £12m overdraft recently negotiated with Barclays, but the bank can demand the money back any time, and the facility must be renewed next May.
So despite the recovery potential, I think Alexon’s too speculative. If the shares are still cheap when credit insurance is reinstated, or the company has survived without it for some time, it will be a safer bet.
In theory:
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In attempting to simplify the economy, the Wall Street Journal succeeds only in demonstrating how complicated it is.
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2 Responses to “Why investors are forgiving Alexon for Dolcis and Bay Trading”
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The question is can the new CEO, Jane McNally, turn around the company with her management team. Alexon has an entirly new layer of management, multiple new Brand Direcotrs and other senior managers who have been drafted in from Top Shop, Peacock and Marks & Spencer. However they all lack experience in their current positions. Meanwhile the design side has been reduced. Can McNally turn Alexon into a “high-street brand”? The high street is crowded and Phillip Green is not going to surrender any territory to McNally. So far the new direction is not showing any promise as sales at Ann Harvey and Kaliko collapse.
As the ex Development Director for the Alexon Group and an original member of the then highly successful brand leader Dash your information on the aquisition of Eastex is incorrect. This was aquired along with Dash and Dereta in the hostile takeover of Ellis and Goldstein in the late eighties.With care, attention and knowledge of the concession business, there is no reason why this company could not be a highly successful turnround situation