This is not the trading update I was hoping for! Trading conditions have deteriorated and revised guidance for H2 FY23 is expected to be $10 to $12 million pro forma NPAT, down significantly on previous guidance of $18 to $20 million for the half provided back in February.

This will bring FY23 pro forma NPAT back to $24 to $25 million compared to $36 million in FY22, down 32%.

The revised guidance answers my burning question about the Blundy-Itaoui take over bid. ‘Why is Chairman Jason Murray selling his stake’? I guess that’s the advantage you have as an insider. If you knew FY23 earnings were likely to decline by 32%, then $1.89 per share starts to sound OK!

What does the news mean for the average shareholder? Firstly we can be thankful that Blundy and Itaoui have come to the rescue with the $1.89 per share off market offer to any shareholder who wants to take it (less the next dividend). For now this should put a floor in the share price of around $1.89 providing the deal goes through. No doubt there will be some panic selling and the share price might go slightly lower. This will provide Blundy, Itaoui and others an opportunity to mop up some shares at slight discount to the take over offer.

It looks like Best & Less is now in need of a decent makeover. It owns some decent brands and there is potential to move away from a discounting mentality to a ‘brand and quality’ focus. I think the incoming CEO Erica Berchtold the boss of online fashion marketplace ‘The Iconic’ has the drive and skills to do this, especially when she has the backing of Blundy and Itaoui. Erica will join Best & Less as chief executive from September. Watch this space!

Is Best & Less a dog as it is? No, far from it! These are reasonably tough times for Best & Less customers and the return on shareholder equity for the group in FY23 will still be around 37%. That’s down a long way from 49% in FY22, but it’s still a very strong valuation metric.

Can it get worse from here? Possibly, however in the absence of a makeover I think return on equity is likely stay around 37%.

Valuation

We have two influencing factors on valuation at the moment. The first is the Blundy-Itaoui offer of $1.89 per share which SHOULD underpin the share price until the deal goes through.

Secondly, there is the intrinsic value of a business currently returning 37% on shareholders equity. Shareholders are currently paying $1.89 for 54 cents per share in equity. If you require an annual return of 15% then you could pay up to $2.10 for Best & Less shares with the business performing as it is now (McNiven’s StockVal formula, including franking credit value). If the Berchtold-Blundy-Itaoui team can turn the business around it could be worth much, much more.

Disc: Adding below $1.85

ASX Announcement Trading Update

Leading value apparel specialty retailer Best & Less Group Holdings Limited (BLG or the Company) (ASX:BST) today provides a trading update for the period ending 14 May 2023.

For the 19 weeks of trading to date in H2 FY23, total sales were $221.9 million, up +1.8% on the prior corresponding period (PCP). Like-for-like (LFL) sales1 were down -1.4%, with store LFL sales up +0.4% and online sales down -18.2%.

Trading conditions were inconsistent throughout March and April, before improving in the lead up to Mother’s Day. May LFL sales are -1.8% below the PCP, with BLG’s core non-discretionary product lines continuing to perform well.

Recent trading in May has been encouraging, including a strong Mother’s Day trading performance. However, based on results to date and with only seven weeks remaining in the second half, the Company now expects to deliver pro forma net profit after tax (NPAT) of between $10 million and $12 million for H2 FY23, noting that May and June are key trading months and assuming no further material deterioration in economic conditions that impact sales. This compares to pro forma NPAT guidance of between $18 million and $20 million provided at BLG’s first half results on 21 February 20232.

BLG Executive Chair, Jason Murray, said: “While trading conditions have remained inconsistent as consumer confidence has been at historic lows, we had a strong Mother’s Day. With the Federal budget expected to provide some much-needed relief for our core customers and a further four new stores due to open before the end of the calendar year, we are optimistic about the outlook for sales growth. We expect to see the benefits of lower product and shipping costs begin to flow through in the first half of FY24 and we will remain focused on tightly controlling our cost base to preserve profitability.”

Update on Takeover Offer

As announced on 1 May 2023, BLG has been advised by BBRC International Pte. Ltd. as trustee for the BB Family International Trust (BBRC) that it and Ray Itaoui (collectively, the Bidder) intend to make a cash off-market takeover offer of all the shares in BLG for $1.89 per share (Takeover Offer) that they do not already own.

BLG continues to work cooperatively with the Bidder to jointly despatch the Bidder’s Statement and BLG’s Target Statement (including the Independent Expert Report) in the near term. BLG shareholders do not need to take any action in connection with the Takeover Offer prior to receiving these documents.

ENDS