Best & Less is currently experiencing a tougher trading environment and is now dealing with on-going pressure on profit margins. As a shareholder I am now strongly focused on the incoming management and leadership.
From September 2023 Erica Berchtold will take over the reigns as the new CEO. The question is, has Erica got what it takes to turn the group around? I found some background on Erica in an article in the AFR from the 14th April 2020 - Best & Less poaches new CEO from The Iconic (part copied below). My take is that Erica does have what it will takes. She is a proven leader, has turned businesses around before, has grown The Iconic to Australia’s largest online-only fashion retailer and as a mother of three is well aligned with the number one customer for Best & Less. I think Erica has got what it takes and I can’t wait for Erica to put her stamp on Best & Less.
“Ms Berchtold has headed Australia’s largest online-only fashion and lifestyle retailer pp(The Iconic) since 2019, during which time the business has grown to over $700 million in revenue. She now will need to look after 248 physical stores as well as an online platform at ASX-listed Best & Less.
Before The Iconic, Ms Berchtold was managing director of Super Retail Group’s Rebel sporting goods division, and she also worked for Specialty Fashion Group as general manager for Crossroads and Autograph, two women’s fashion apparel brands.
She started her career in technology sales and distribution before swapping into retail and joining Harvey Norman as a product manager in 2000. She then moved to Rebel, then owned by Harvey Norman as head of merchandise and marketing. Furthermore, she helped reposition the business ahead of its sale to private equity in 2007.
Under her leadership, The Iconic expanded beyond apparel and entered into partnerships with the likes of AirRobe, where shoppers could begin offering resale as an optional service at the point of sale.
Ms Berchtold said she was excited by the challenge of taking the retailer through its next phase of growth.
“Best & Less’ brands are synonymous with quality and value and having a close affinity with mum and her family,” she said. “As a mother of three young children myself I can personally attest to that, and I look forward to deepening that relationship further to move us closer to our goal of being the number one choice for mums.”
Chairman Jason Murray said “Erica’s strong retail experience and track record of delivering profitable growth in a variety of retail markets, alongside her proven leadership skills, makes her the ideal candidate to lead the business through its next phase of growth. The board has been extremely impressed by Erica’s passion for our customer and category, and her value creation mindset.”
Disc: Held IRL (10%), SM (21%)
Most investors have heard of Brett Blundy (Lovisa, Bras n Things etc) but not so familiar with the name Ray Itaoui.
In short, Ray Itaoui is the man who took Sanity off Brett Blundy’s hands in 2009 and turned into a profitable business, when Brett Blundy was about to fork out $18 million dollars to shut the business down.
A self-made millionaire, Ray Itaoui could be the right man to turn Best & Less into a better business. Below is a snippet on Ray from a story about both Brett Blundy and Ray Itaoui which appeared in the AFR on 1st May 2023.
Blundy’s partner in the Best & Less takeover, Ray Itaoui, is another product of the retail maestro’s carefully curated culture, which even include “commandments” that Blundy shared with the Financial Review in 2016, including “perfect service”, “cost is the enemy”, and “do it now”.
Itaoui, 49, the son of Lebanese migrant factory workers who joined Sanity as an area manager in 2001, bought the music chain from Blundy in 2009 when the elder man wanted to spend $18 million shutting it down.
That turned out to be one of the few calls Blundy has got wrong – other mistakes include coffee chain Gosh, and dotcom-era angel group Tinshed, which both flopped around the turn of the century and taught Blundy to stick with his retail knitting.
Itaoui’s own retail acumen has seen him continue eking profits from Sanity even as the market for physical media all but collapsed. It made a $3.7 million profit in 2021-22, and its profit margins should increase next year after Sanity closed its 50 remaining stores in April to become an online-only retailer.
More meaningfully for Itaoui’s wealth – which the Rich List research team estimates at just outside the list’s $690 million cut-off – he was also invited by Blundy into his latter-day foray into homemaker centres.
That created the $2 billion, ASX-listed Aventus Retail Property Fund, of which Blundy owns 22.6 per cent and Itaoui 5.45 per cent.
“It’s like a drug,” Blundy said of retailing in a 2013 interview with the Financial Review.
“It keeps me grounded. If you do good it’s rewarding but if you get it wrong you get smashed.”
This morning the Best & Less group (BLG) announced their 1H FY23 results, and their Presentation which was followed by a webinar.
Basically nothing has changed from the trading update on the 25th January with 1H23 NPAT down 31.8% pcp, and today the share price lifted by nearly 10%. Why?
I sat in on the webinar this morning. I came away feeling that BLG is a well-managed business in the hands of experienced, knowledgeable and capable people who ‘say it as it is’ and can be trusted. I guess declaration of an 8 cps fully franked dividend might have helped a little also. Currently yielding about 9.6%, or 14% when grossed up with the franking credits.
While BLG is still looking for a CEO, they are not leaderless, and they are not rushing this decision. I feel very comfortable with that.
Jason Murray has led BLG before, and combined with CFO, Andrew Moore’s sound knowledge of BLG’s financials, you just can’t help to come away trusting they will deliver on their strategy and their FY23 guidance of between $31.7 to $33.7 million NPAT. They also confirmed that their growth strategy of 10 new stores per year is on track.
The stores are well positioned with fresh inventory and they expect gross margins to improve from just over 47% to between 48% and 50%.
I found the headwinds v tailwinds slide interesting.
Jason pointed out that there were were lots of headwinds in 1H23 which disappointed. However, there are lots of tailwinds for 2H23 which will help to improve margins and deliver their NPAT guidance. For the first 7 weeks of 2H23 sales are slightly ahead of BLGs expectations.
My valuation of $2.70 (and justification for it) remains unchanged from my update on 15th February.
Disc: Held IRL (9%), SM (20%)
Thanks @NewbieHK and @rh8178 for your straws on the Best & Less trading update.
After reading through the Best & Less (BLG) Trading Update several times, I’m still a bit confused about what it really means in regards to the outlook for 1H23. I don’t think I’m the only one who thinks this after reading Glenn Dwyer’s article Soggy Start to FY23 Sees Best & Less Shares Slammed on Sharecafe.com.au. Glenn referred to “the mixed nature of the report.”
What matters is the market did not like the update and has sent the share price down 16% over two days!.
Yes, the weather has been unseasonably wet and cold lately and the summer apparel has been slow out the door over recent weeks, but sales in the first 20 weeks of 1H23 are up 22.8% on same time last year. However, earnings were flat compared to the same period last year which was also significantly impacted by lockdowns and trading restrictions. I think most investors were expecting earnings to be higher this year.
On a positive note BLG said “with the major shopping season ahead, including Black Friday and Christmas, Best & Less are expecting a strong finish to the first half of FY23, with ~60% of first half profits typically recorded in the final six weeks.“
The lower Like-for-like sales makes things a bit confusing, especially when overall sales were up 22.8%.
- Overall “Like-for-like (LFL) sales are down 7.4%
- In store LFL sales are down 2.3%, and
- Online sales are down 32.9%
I don’t know how BLG calculate their LFL sales, but according to Investopedia, “Retail companies use the like-for-like metric most often for their insight into existing stores versus newly opened stores. If a company has an average like-for-like store sales growth rate but a high total revenue growth rate, it can be a sign that new stores or new products are drawing shoppers' attention.”
This is where it starts to get a bit complicated with BLG. Overall sales were up and earnings were flat for the first 20 weeks PCP, yet LFL sales were down.
As far as product goes, the unseasonal ‘chill factor effect’ on summer apparel sales will obviously have a negative impact on LFL sales, but hopefully this will sort itself out when summer finally arrives.
Next we need to consider what is happening with BLG stores that might be causing overall sales to be up while LFL sales are down.
According to the FY22 Annual Report, during FY22 Best & Less “opened six new stores and relocated four, including two stores to sites with expanded floor space. Nine stores were closed during the period (including five which were planned closures), as we remain willing to discontinue leases where it does not make financial sense. We have agreements in place to open 11 new stores in FY23, including three relocations to larger sites. Our store footprint will remain relatively equally weighted between metro and regional areas.”
Have you been keeping count? I couldn’t find the number of stores this time last year. However in the FY21 report there were plans to gain 4 additional stores. On the 7 October this year there were 243 stores (FY22 Annual Report). That’s only 1.6% more stores, so this doesn’t account for the 22.4% increase in overall sales.
So there is a lot going on with some stores opening, some stores relocating, some stores expanding and some stores closing. Overall, sales were up 22.4% which makes me think BLG’s store restructure strategy, including closing 9 less profitable stores and opening 13 stores in better locations (assumed number) might be working. BLG said the average sale price to date remains above the PCP, which would also be contributing to higher overall sales.
Coming back to the flat earnings and lower LFL sales. If the main cause is the prolonged winter chill impacting summer apparel sales, there is nothing a good blast of hot weather can’t fix. If it’s more than that, then there’s a problem.
Here is what needs to happen for it to be a great year for BLG and it’s shareholders:
- Christmas trading picks up in the final weeks of 2022 delivering the typical 60% of first half sales
- second half sales exceed the PCP as BLG expects them to do
- The gross margin percentage for 2H23 holds up with the PCP.
I’m not asking for much, but this is what I’m hoping to find in my Christmas stocking this year!
Disc: Held IRL
BABY IS THE FOCUS
Babies and Kids make up approx 50% of BLG sales.
In the FY22 Results Announcement BLG Chief Executive Officer, Rodney Orrock, said: “As we move further into an uncertain economic environment, with rising interest rates and cost-of-living pressures placing families under increasing financial strain, we expect an acceleration in the migration to value that is already underway.”
“Our differentiated value proposition of ‘twice the quality at half the price’ and focus on the non-discretionary baby and kids’ segments positions us very competitively to provide a family’s clothing essentials at an attractive price point.”
I think BLG could be a retailer that is strategically placed to do well under tough economic conditions by focusing on non-discretionary items for BABY, kids and mothers. Baby is the entry point and there are over 300,000 births per year in BLGs sights!
Rodney said “In the face of global supply chain disruptions and input cost inflation, we expect the strength of our vertical retail model and the retail experience of our team to shine through. This enables us to continue to take market share, while maintaining gross profit margin and tightly managing costs, delivering continued operating leverage as we grow.”
This year BLG invested in the online sales platform and added new options such as ‘click and collect’ and ‘ship from store’, which improved online capacity and service by fulfilling online orders from select Best & Less stores closer to the customer’s location
Online sales grew by 15.6% on the PCP, with increased conversion driven by an enhanced online customer experience and diverse fulfilment options. The online channel delivered 11.3% of total sales in FY22 (FY21: 9.2%).
This year BLG will use AI to deliver personalised customer experience.
BLG will open 11 new stores in FY23 with 3 additional relocations to larger sites.
Strategic Priorities
Disc: Accumulating IRL
16 September 2022
Background
The Best & Less Group (ASX: BST) was founded by Berel Ginges and opened its first store in Parramatta in May 1965. BST has grown to be one of the leading value apparel specialty retailers in Australia and New Zealand, with a profitable 245-physical store network and growing online business.
BST successfully completed its IPO raising $60 million at an offer price of $2.16 on 26 July 2021 (14 months ago). BST traded ex-dividend yesterday (a dividend of 12cps, fully franked) and the BST share price closed at $2.26 today.
BST operates across two brands: Best & Less in Australia and Postie in New Zealand with a specialty focus on retailing baby and kids’ apparel.
BST operates a largely ‘vertical’ retail model, whereby 86% of the range is designed in-house, sourced directly from factories, distributed via their supply chain and sold exclusively in their stores and online channel.
Management
CEO: Rodney Orrock joined BST in 2016 and leads an experienced management team with over 300 years of combined retail experience and a track record of significantly improving the customer offer, company capability and financial performance.
Rodney has over 35 years of retail and supply chain experience, running national teams and groups across diverse product areas. During this period Rodney has worked for brands such as IBM, Harvey Norman and Domayne.
Chairman: Jason Murray first joined Best & Less Group in February 2012 as Managing Director (when the Group was known as Pepkor South East Asia). He left the business in October 2018 and then re-joined in December 2019 when the business was acquired by Allegro Funds.
Jason’s previous experience includes eight years at The Just Group, including as CEO and Managing Director for the last four and a half years, and over ten years with the global management consulting company McKinsey & Co.
Jason’s core capabilities and passions are the leadership, strategy development and transformation of retail businesses.
Jason has a Bachelor of Economies (First Class Honours and University Medal) from the University of Sydney and a Masters of Business Administration (Dean’s List) from IMD in Lausanne. He is a member of the Australian Institute of Company Directors.
Brett Blundy, a Non-Executive Director, is one of Australia’s best known and most successful retailers and entrepreneurs with a 40+ year track record of successfully creating, growing, and investing in retail businesses.
Brett Blundy is Chairman and Founder of BB Retail Capital (BBRC), a private investment group with diverse global interests across five key verticals: consumer, funds management, property, agriculture and technology. BBRC owns 16.45% of BST Shares.
BBRC’s retail presence extends to over 800 stores across more than 15 countries. Brett is currently Chairman of Lovisa Group (ASX: LOV) and a non-executive director of Accent Group Limited (ASX: AX1).
In addition to BLG, Brett is a significant shareholder in the following highly successful retailers:
• Accent Group (ASX: AX1)
• Dusk Group (ASX: DSK)
• Lovisa Group (ASX: LOV)
• UniversalStores (ASX:UNI)
The fact that Brett Blundy is a Director on the BST Board and holds 16.45% of the business gives me a high level of confidence that BLG will become yet another highly successful Australian retailer in the BBRC portfolio.
Top 10 Shareholders
Source: Simply Wall Street, 16 September 2022.
Allegro recently sold 11.1% of the total shares in the business through a block trade with Bell Potter reducing their holding to approx 32% of the company.
Independent Non-Executive Director, Stephen Heath has recently purchased over $212,000 of BST shares on-market at $2.30 per share.
Board of Directors Experience
Senior Leadership Team
Reference: Best and Less Group Prospectus (22/07/21)
Disc: Held IRL