Wednesday May 28, 04:27 PM
Could Topps Treble Again?
By Stuart J Watson
Who'd buy a retail share at the moment? The sector as a whole is down by over 40% on this time last year and many companies have, of course, fared far worse. There are some retailers worth purchasing though, or at least worth keeping very close
tabs on should conditions start to improve.
One such shopkeeper is Topps Tiles (LSE: TPT.L - news) (LSE: TPT). It floated at 11p back in 1997 when it operated around 50 stores. Now it runs over 300 stores in the UK and 20 in Holland and profits are up tenfold. The shares peaked at over 300p last Spring and the last annual dividend was almost equal to its float price.
Over the last 12 months, things have gone less well. Sales growth has slowed and the shares have dipped below a £1. This morning the company released six-month figures to the end of March which showed a 4% rise in sales to £106m and a 5% dip in earnings per share to 7p.
An unexpected dividend cut from 3.75p to 3p was also announced. Topps intends to increase its dividend cover from 1.4 times to 2 times in order to reduce its debt more quickly. The company has a £110m bank loan, the vast majority of which has to be repaid between 2010 and 2012.
The current trading figures were also a little disappointing with sales ahead by 2% overall, but down 4.5% on a like-for-like basis in the UK. The Dutch stores fared much better, reversing a recent decline.
A market leader
That's got pretty much all of the bad news out of the way. So what does Topps have in its favour? Well, it's a market leader with an estimated 22% share. So far, the large supermarkets have kept clear and this has allowed Topps to earn an operating profit margin in excess of 20% for the past few years. This is very high for a retailer and its gross margins of over 60% are equally impressive.
In the UK, around 250 stores trade under the main Topps brand and the remainder trade as Tile Clearing House, which is more of a cash and carry operation. Topps has been opening 30 new stores a year but last summer announced the opening programme would be cut to 20. Its medium-term target is to have over 400 stores in the UK. In Holland 5 new stores are planned each year until a target of around 60 is reached.
Topps' stores tend to be on the small side, averaging 6,000 sq ft. So although the opening programme still appears quite aggressive in the current climate it should be manageable. Costs are kept down by choosing low-rent, out of town locations and sourcing materials direct from overseas suppliers. A store refurbishment programme is also underway. As of last summer, 65 stores had been converted to the new format.
There aren't many large-scale competitors. However, Tile Giant, acquired late last year by Travis Perkins (LSE: TPK.L - news) (LSE: TPK), is cited as one to watch not least because it employs a few ex-Topps managers. It only has around 30 stores at the moment but intends to expand to 100 over the next three years, by which time it hopes to have sales of £100m.
The demand for tiles is predicted to continue growing, so it should be able to accommodate both these major store opening programmes. Tiling is generally seen as a low-cost home improvement and the UK only consumes one third as many tiles as our North European neighbours, a fact that Topps often cites to illustrate its long-term growth potential.
A good time to buy?
Even if the good times do return, Topps will not grow as quickly as it has done in the past. A store opening programme of 25 has far less impact now the number of stores exceeds 300. It seems unlikely that profit margins can be squeezed much higher either, although I thought that back when they were just 15%.
Topps' shares dropped about 5% to 86p after today's figures. This values the company on a price earnings ratio of between 6 and 7 times for the year to September 2008. The dividend yield should be in excess of 7%. Despite its lower growth prospects, normally these sorts of numbers would be a clear buy signal but we live in unpredictable times. OK, as far as the stock market is concerned, it's even more unpredictable than usual.
In the past, Topps' shares have tended to perform in spurts. They almost quadrupled in 1998/99 when I was lucky enough to be an investor. They quintupled in 2003/04 and doubled in 2006. I feel another similar spurt could be on the way, although it may not begin until they are clear signs that the company's recent fall in like for like sales has been reversed. Topps could soon be rewarding its shareholders once again.
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