Back From The Dead

Published in Company Comment on 13 January 2010

Blacks Leisure could be making a remarkable recovery.

Fortune, they say, favours the brave. In which case, the more intrepid investors among us may want to cast their eyes over outdoor clothing retailer Blacks Leisure (LSE: BSLA), which issued an upbeat trading update on Monday.

Just a few short months ago, Blacks -- trading on the High Street as Millets, Blacks, Freespirit and O'Neill -- was on the ropes, and looking as though it would shortly be out for the count. On 30 September, for instance, Alan Oscroft wrote about how to read the accounts of companies that were struggling to stay afloat due to high levels of debt and short‑term liabilities.

And the company's accounts that he chose as an example to dissect in his article? Yup: Blacks Leisure. Breached banking convents, steep losses, high cash outflow, stratospheric levels of interest, worsening high street trading conditions, onerous lease terms: you name it, and Blacks had it in spades.

In another, related article, looking at beleaguered retailers in general, Alan then reported that Blacks was planning to close 89 loss‑making O'Neill surf wear stores, noting that investors had lopped 30% off the value of the shares -- then valued at 33 pence -- in just a week. And even at that price, suggested a poster in an article comment, the shares looked expensive: Blacks was one to short, was the considered conclusion.

Well, it's to be hoped that the poster in question didn't short Blacks, because the shares have subsequently had a pretty good run. Although they dipped a little lower in the following weeks, a steep upturn then began, seeing a recovery first to 45 pence, then 50 pence. On Monday's news, they rose again to 55 pence.

What happened?

The good news started back in early November, when a restructuring plan was agreed with the company's bankers, Lloyds Banking Group (LSE: LLOY). Alongside renegotiated banking facilities, the deal provided Blacks with an element of protection from landlords of the closed shops, in respect of broken lease terms.

Three weeks later, came even better news: creditors, too, had approved the restructuring, sending shares up 50% on the day. A day later, shareholders too approved the deal.

Then came the trading update.

Solid sales

Entering the surf market under the O'Neill brand had been the wrong thing to do, conceded the company: retrenching to its familiar core markets was helping to stem losses and turn the tide. Surf wear was now represented by just 13 of the company's 313 outlets, trading as Freespirit, and contributing just 5% of sales.

Trading in the core outdoor wear market had been healthy in the financial half year ending 7 January, with like‑for‑like sales increasing by 13.1% -- and climbing even higher, to 15.2%, in the final six weeks of the period, bolstered by cold and wet weather. Critically, gross margins had remained in line with those reported in the first half of the year.

Accordingly, the company 'was on a much stronger footing', it reported. "Blacks Leisure is now a significantly stronger business, and is better placed than it has been for some years," said chief executive Neil Gillis.

Cash call

Accordingly -- having just closed 87 stores -- the company now proposed to open new stores, 'principally by re-entering markets vacated following the closure of stores." Yes, you read that right: opening up again, selling outdoor wear, in the very towns and cities where surf wear stores had just closed.

Why? Because the plan was to do so by paying much reduced rents -- it being the rents that had typically tipped the previous stores into being loss-making. Get the rent right, ran the logic, and these outlets should be profitable.

Accordingly, Blacks is considering an equity fund raising in the next few months -- mostly to finance the new stores and re-format existing ones, but also to eliminate a seasonal bank overdraft of £7.5 million which attracted a higher rate of interest.

Risk versus return

There's no doubt that Blacks shareholders have had a rough ride. Trading at over 600 pence four years ago, last year's plunge to 30 pence and lower must have felt as if the company had strayed into banking, not surf wear.

There's little point, too, in looking at past financial results and ratios: a rear-view mirror is no use. A telescope -- preferably pink-tinged -- is the viewing tool of choice here.

But for investors prepared to take a longer-term view, and live with a little risk, Blacks has returned from the dead and looks cheap. Despite the company's small size -- its market cap is just £24 million -- the shares can even be held in an ISA, locking gains away from the tax man. As I said, fortune favours the brave -- but are you brave enough?

More from Malcolm Wheatley:

Malcolm own shares in Lloyds.

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lizhiyong66 03 Oct 2010 , 12:02pm

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