Footasylum shares plunge 50%...again

After a grim update in June, the trendy footwear firm has had a terrible summer. Lee Wild runs through the numbers after a second profits warning in 2018. 

Less than three months after a crushing profits warning, AIM-listed branded footwear retailer Footasylum Ordinary Shares is at it again, and with the same outcome. Now expecting to report an interim loss and full-year cash profit "significantly lower than previous guidance", and less than half that of the year before, the share price halved in value within minutes of the opening bell Monday.

A similar thing happened following the release of annual results in June when Footasylum issued a miserable outlook and warned that extra investment and costs would crimp growth in profits for the year to February 2019.

Listing its shares in November 2017 following a placing at 164p, Footasylum traded above 270p briefly early this year, but it’s been downhill ever since. A well-documented slowdown on the high street gets the blame, but even an ongoing programme of investment has failed to improve sales by enough.

Source: interactive investor            Past performance is not a guide to future performance

At interim results in October, Footasylum expects to confirm an 18.5% increase in revenue for the six months ended 25 August 2018 to £98.6 million - shop sales rose 12.4% to £66.3 million and online 28.5% to £30.2 million.  

A decent performance in May and June explains the company's belief in June that full-year revenue would match market forecasts, although cost increases would mean only "more modest" growth in profit than in 2018.

Now, we hear that despite strong year-on-year growth in online sales, "store performance during July and August was more challenging", made worse by delays in new store openings and upsizing. Coupled with the absence of any recovery on the high street, management had little option but to reassess overall expectations for this year.

Greater discounting of stock has also hit gross margin – tipped by house broker Liberum to drop by 180 basis points in the first half - which means Footasylum's annual cash profit will be under half the £12.5 million in made last year. Liberum slashes its estimate by 64%.

After downgrading expectations for growth in full-year sales to 17.1% from 22% previously, assuming trading conditions get no worse, the broker now pencils in a profit of £4.9 million compared with a previous forecast of £13.7 million!

Look further out, and profit estimates for 2020 plunge by 54% to £7.6 million, and by 49% the year after to £10.1 million. At the adjusted pre-tax level, forecasts of fast-growing profits are cut to a loss of £1.9 million in the current year, then losses of £1.1 million and £0.4 million in 2020 and 2021 respectively.

"The group should hopefully start to see the benefits from some of the initiatives laid out by the executive chairman [Barry Bown] but these take time to deliver," writes Liberum, who has put both its rating and price target under review. "Until then visibility on earnings is low and the rest of FY18/19E is likely to be difficult."

Management may be optimistic, and work going on behind the scenes should have a positive impact, but unless conditions on the high street improve, it could be some time before we see Footasylum fulfil its true potential. 

Predicted to lose money at the pre-tax level for the next year and in 2021, buying the shares even at these prices requires a significant leap of faith. Christmas will be hugely important for Footasylum as it is for every store on the high street and online. There will be investors looking to make a quick buck here, betting that the initial drop in share price is overdone, but those who believe that profits warnings really do come in threes will steer well clear.