H1 performance was as guided at the December profit warning, but we downgrade FY13E PBT by 4% to £110.2m to reflect guidance for FY gross margin decline. Focus will be on whether management is clear on what went wrong. There appears to be no change in their top-line strategic objects. We remain unconvinced there is a quick fix and forecast FY14E to be the fourth year of EBIT decline. For us, the valuation is not compelling enough. We reiterate our Sell and cut our TP to 64p, in-line with the downgrade.
H1 PBT as guided at Dec’s profit warning. 1H company PBT down 24.5% to £85.2m?. EPS 5.6p (-21.1%), DPS 1p (flat). Group gross transaction value up 2.1% with LFL 1.5%. Group gross margin was down -100bps due to markdown after weak sales and higher promotional activity, pre and post Christmas
Downgrading FY14E PBT by 4% to £110.2m to reflect guidance of FY gross margin down 50-70bp (we had -40bps) and net interest £18-20m (we had £17.5m) offset by a nudge up in sales growth to 2% from 1.5%.
Focus will be on strategy update. There appears to be no change in top-line strategy objectives, though there is some tweaking in emphasis. Management still believes promotions are a strength, but will introduce clearer promotional periods with fewer markdown days. It will offer more competitive online service options by Xmas, which is a necessity given consumer demands. It will also introduce wholesale and licencing models internationally. We are unconvinced there is a quick fix and believe the investment needed will hold back profits, though we can see a small bounce in FY15E profits from lower markdown. We believe management should cut back on promotions and invest in product quality as the brands have been devalued by all the discounting.
Valuation not compelling enough given the structural pressures on the business. Reiterate SELL, with TP cut to 64p, based on historic average PER of 8.4x. Key risks – changes in the economic and competitive environment.