Last post I outlined three stocks I thought were interesting to look at because of the UK question - the problems in valuing a group as a whole when different parts within that group are performing so differently. This post I'll try and highlight a few different metrics and ways of looking at things to try and draw distinctions between the companies. This is, of course, all complicated by the fact that the three - Dixons Retail (LON:DXNS) , Tesco (LON:TSCO) and Mothercare (LON:MTC) - sell quite different things, but then that's half the fun in investing!
On whole-group levels we see the valuations aren't too different on earnings terms for the three companies. All are on depressed last-year multiples (note the scale) and both Dixons and Tesco have forward earnings estimates which put them on a P/E of less than 10. Mothercare, I should note, is forecast to post a tiny profit next year and significant improvement thereafter. On tangible book terms, Dixons is the only one posting negative equity - largely because its recorded equity comprises mostly of goodwill instead of hard assets. Dixons do have considerably less to pay in obligated lease payments however, and their classification puts them on balance sheet, unlike Mothercare's and Tesco's considerable bills. The type of stock also sees Dixons carrying a large amount of inventory (£960m) and therefore payables (£1.6bn) in group, which is something that one should always consider if forecasting a slowdown in the future.
Of course, if we accept the postulate that it's good to be international and bad to be in the UK at the moment, we want to see a growing international revenue base and a shrinking UK one. The graphs above are all normalised to the same scale for easier comparison, and show that Dixons' strong Nordic business means it is the most benefited by international sales. In terms of growth, however, Mothercare is (by some distance) growing the fastest of the three, which is perhaps more important from my point of view. That Dixons has such a strong international contribution yet still posts losses is hardly a ringing positive. The dotted white bars simply represent how shares would shape up if they continued at the same pace as they have done for the last 4 years - hardly a scientific measure, but maybe an interesting starting point.
Happily, both Dixons and Mothercare management make noises to suggest they're not clinging too heavily to their UK store estates, though there are some question marks. First Dixons:
A reduction from the current 642 to 450 is welcome, but if this entails significant upsizing (in terms of average sq. foot) then they may be reducing their exposure less than headline figures suggest. As for Mothercare:
A bit more wishy-washy perhaps, but that comes with the territory of not having a CEO. All eyes will be on his decisions, I suspect, as I think the market would rather like them to cut loose from the burdensome UK retail market and focus on the successful international segment. While it's not mentioned in the quote above, Mothercare do often state their focus on opening out-of-town superstores - not dissimilar to Dixons - and away from the high street. While I think it's probably better than the high street, I don't think it's better than the other alternative - far more savagely cutting back.
As for Tesco, who I haven't mentioned? Well there's an obvious reason for that - no-one really wants them to cut back UK exposure, as they have a market dominating position in a growing industry, not flagging ones! US growth was reported to be particularly substantial in their last trading statement, so it's probably safe to assume that the giant will continue on its war march around the world.
Where do you stand?
An open question, I suppose. I had hoped to get figures for total market sizes - the crux of my argument - but I couldn't find any, so I'll have to post the reasoning without the numbers and leave it open for debate. The real meat and bones of the argument, I think, is the difference between cyclical and secular dips in sales, and whether the UK is really where anyone wants to be. Let's talk competitive advantages:
Mothercare (LON:MTC) : In the UK, a slight reputation for quality against an established reputation for being overpriced. Too niche a market to serve in one store, with too diverse a product range to be efficient? Does it make more sense for their goods to be split up? Baby toiletries/medicines/everyday things in chemists, clothes in clothes shops, prams in department stores. Internationally, they benefit from being a western brand with that pedigree quality, in regions with growing aspirational middle classes.
Dixons Retail (LON:DXNS) : A lot of the gross margin coming from services on top of the sale of the goods, most of which arguably offer little value to the consumer - though sales do suggest otherwise, so I may be being overly harsh! Growing internet trends seem likely to push sales away from stores in the long run, but logistically having a superstore may have some benefits, and many consumers like seeing and touching when they spend upwards of a few hundred pounds on an item. In that sense, then, leakage to the internet may have plateaued as all the ones who were likely to switch to the internet probably already have. International seems equally shaky as markets have similar problems, barring Nordics.
Tesco (LON:TSCO) : Very strong brand name both internationally and in the UK. Margins seem consistent around the business, which suggests their business model is rather honed; though the US issue did leave some investors wondering why they bothered to enter a market rather different from the more obvious choices (Eastern Europe, Asia etc.). Long term trends seem to favour more consolidation in groceries, not less, and online is equally dominated by the same companies. Sheer economics of scale seem to make the market entrenched.
I tend to prefer Mothercare to Dixons, then, and see Tesco as a somewhat different story - but still a stock I like. UK pessimism is worrying, but they do have a strong international brand that continues to grow, on a base of still being market leader in the UK. If it sounds like I'm sitting on the fence slightly, I am; I am finding it very difficult to disentangle my personal opinions from my investment decisions, and as someone who doesn't shop at Mothercare, sees little value in Dixons (I buy everything online) and can hardly comment on Tesco's reputation around the world, I am in an awkward spot! I feel my own great dislike of the Dixons model may be biasing my opinions somewhat, which is hardly a good thing when one's trying to make rational investment decisions. That feeling is exacerbated by the fact I'm probably more bullish than most on the UK consumer prospects in the next few years, as it leaves me in a position of wanting to like retail but disliking the business model behind it.
With my usual trials aside, though, I'll leave with an excellent article emailed to me from a Norweigan blog on Dixons; the author of which is far more bullish on the long term prospects on the company than I am. He argues for the logistical and cost advantages of having everything in one place, and presents some very creditable reasoning for why they're mispriced. Well worth a read!