What can we learn from the demise of Bonmarché? #BON
On Friday (18th October) it was revealed that the fashion retailer Bonmarché (formerly listed as BON) had gone into administration.
Readers may recall that Bonmarché was acquired (actually only 95%) by retail giant Philip Day and delisted back in August.
Some readers may also recall that I traded in the shares prior to this; I posted my reasoning at the time here.
In this article therefore I will look for lessons to be learned from that trade and from Bonmarché’s demise in general.
Reviewing my trade
In simple terms my trade was based on Bonmarché’s fate being somewhat binary. It would either go bust or trade through its difficulties and recover. On the upside I modelled a share-price of 60p, which was actually quite conservative representing a market cap of £30m and a Price to Sales ratio of less than 0.2x.
The maths were thus:
On 1st April (the day prior to Day’s bid) the share price was 18p, implying a potential downside of 18p / share and a potential upside of 42p (based on 60p as above), or a survival ‘probability’ of c. 30%. Interesting, but not interesting enough.
Subsequent to the bid at 11.445p/share, the price in the market fell only to 13.5p, indicating a likelihood that the bid would not be accepted. I agreed at the time that the bid succeeding did not look likely and this still remained true until a subsequent profits warning and change in recommendation from the board.
Whilst the offer remained open, this changed the maths significantly. The downside was now only 2.055p per share (13.5p minus 11.445p) and the upside 46.5p / share. This was equivalent to only a 4% survival chance; that was sufficiently interesting for me.
On 26th June the company issued a further profits warning and reversed their stance to recommend accepting the offer; this was the signal to sell. Now, not quite 4 months later the company has failed.
Did I make a mistake?
I do not think so! Even with the benefit of hindsight, the above numbers still look compelling. The only “error” (if there was one) was to assume that Bonmarché might survive, when in fact they failed.
In my defence I have to point out that I only risked a little over 2p per share on this assumption, whereas Philip Day (who knows somewhat more than I do about fashion and retail) risked 11.445p per share.
This is a useful reminder that even if you put the odds in your favour (and I felt that they were heavily so here) you still will not win every time.
I reminded of a piece on breakfast television a few years ago, where they had someone extolling the merits of buying lottery tickets when there was a “double rollover”. The argument being that in a double rollover the total prize money would be significantly greater than the ticket sales income. The presenter made the point that the odds of having the winning ticket were still very small and unless you have that ticket you have not one. The lady in question responded that by being able to buy tickets at these “odds” she had already “won”. Mathematically, I could see her point of view, but the fact remained that in order to be sure her “win” actually paid out, she would have to play an infinite number of times.
You cannot win the lottery if you don’t buy a ticket; but it is still a lottery!
Are there more specific learnings from Bonmarché?
The clear one for me is that investing in discretionary retail in the UK remains very risky and it is very hard to pick the potential winners.
If one looked at Bonmarché even a year ago, you would have thought them one of the likely survivors.
They were forecasting revenue growth in a difficult market, albeit at lower margins. Their net debt was a modest £4m (£9.5m gross). Operating cashflow remained strong. Their leases were relatively short, providing the opportunity to exit loss making stores or negotiate rent reductions. The newish CEO Helen Connolly (August 2016) seemed to be making a good fist of things.
One year later; bust! I cannot put my finger on one single issue or event that caused this dramatic collapse.
I have heard it said that this year’s fashion range has not impressed. I have no idea on this point, but it is always a risk for a fashion retailer.
It is actually quite hard to see what precisely went wrong to cause the ultimate administration.
Helen Connolly said: “The high street is going through a period of historic difficulty and we have been unable to weather the economic headwinds impacting the whole of the retail sector” and also blamed the drawn-out Brexit process “Without such a delay, it is feasible to believe that our issues would have been more manageable. Instead, it has only intensified the pressures.”
However, that does not ring true to me; if this were just a temporary issue then surely Philip Day would have bailed them out in order to protect his investment (unless of course he has plans to buy assets out of administration)?
Also, it does not really gel with the statement: “We have spent a number of months examining our business model and looking for alternatives. But we have been sadly forced to conclude that under the present terms of business, our model simply does not work”
They concluded that a CVA would not help them, which quite shockingly suggests to me that irrespective of store rents they do not believe they can make a profit.
This is all at odds to the view from the administrators that: “There is every sign that we can continue trading while we market Bonmarché for sale and believe that there will be interest to take on the business,”
They would say that wouldn’t they?
I am sure that there is more to this than meets the eye, so I would be reluctant to draw too many conclusions at this stage.
Back to the useful lessons, however, this all reinforces my reluctance to be invested in “discretionary retail” until it is categorically clear that recovery has started and that the company in question is actually benefiting from this recovery.
In the meantime, one can only hope the sake of Bonmarché’s nearly 3,000 staff that the administrator’s optimism bears fruit.
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