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As Hardboy said, today's update is a bit of a curate's egg. The bad news though, to me, is a lot more concerning. The watch market has been too strong for too long, with a considerable no. of spivs buying new watches, typically Rolex's, to flip them. When Burberry and Watches of Switzerland warned on profits recently, as with other high end / upmarket fashion and jewellery businesses, the finger was pointed at the Chinese. Today's warning from HAT reinforces a message that the watch market has seriously imploded, in double quick time. If so, there will be a big write-down in the value of HAT's stock and there could be little in the way of a recovery in the watch market in 2024.
Profits warnings, as they say, come in 3s. So soon after saying how well trading was going, it suggests that today's announcement will not be the last where forecasts get downgraded. Store openings will also probably have to go on hold.
I have traded this stock well, several times. Not this time though. Would I add to my position now? No. The fundamentals, like the low p/e and attractive yield, suggest holding. However, as with many AIM stocks, quality of earnings need to be considered and with HAT's operations focused on the less well off, for those not invested, why bother? There are plenty of other cheap and undervalued AIM stocks, as well as retailers, where newsflow is much better.
Apologies if this is a bit of a rambling post - I'm trying to set put my thoughts and interpretations, but they are not clear cut, so I'm hoping writing them down will help clarify my opinion.
One of the great things about H&T's business is there are so many different bits to it, which don't always wax & wane in unison. On of the difficult things about understanding H&T's business is there are so many bits to it which don't always move in unison.
Pawnbroking is doing well. FX is doing well. Gold is doing well. Retail had a good November, but seems to have dropped away a bit in December. Is this a blip, or start of a worrying trend? Money transfer is subdued.
Yes they have been affected by the rise in the minimum wage. which means costs have gone up more than inflation; but this should be more of a one off hit.
Uh-Oh's great post suggested H&T's customer base is the less well off. Maybe as a whole, but they quote an average watch price of £1600, so that's not the case in all areas of the business.
So it's a bit hard to work out; but overall profits are up 40% - that is massive when talking about such a long established business. So it's been a good year. The question is where from here? If the economy is going to remain subdued, than pawnbroking should continue to do well. with much of the world intent on destroying each other, the gold price should remain fairly high, so Gold should continue to do well. The question mark hangs over retail, especially with a significant expansion plan underway.
I think the drop in share price from the high 400s to low 400s largely pre-empted this profit warning, so today's drop is over done, and I think this is a buying opportunity. 40% increase in profit gives an EPS of over 50 - so a current PE of about 7. If they hold their dividend (& I think they'll increase it) we get a yield of around 4.25%. The share price as I type is also below the net asset value. So I am convinced given all the known knowns this is a good entry price.
It would be great if they could let us know how well retail has done in January as soon as they know, but I guess we'll have to wait till the finals for the next update.
anyway, I've backed my thoughts and added a small amount just now.
I think my main 2 points from today's update is that stock write-downs will happen and near term growth will slow. Re the former, the balance sheet can take the hit, for what is a relatively small part of the business. Re the latter, the low rating is discounting slowing growth. However, that is not the same thing as saying the shares are good value. The rating has been this 'cheap' on a no. of occasions in the past. For the shares to re-rate, reassuring news will be required and I don't see that happening before the next results. It may even be for much of 2024, bearing in mind the importance of Christmas trading to a retailer.
I'll be interested to see what Master Investor makes of this update in the next day or two because they were very bullish. If you don't subscribe, it is worth doing so because it provides a no. of good tips, with many articles written well. The service is also free.
Uh-oh - not one of “Master” Investor’s better tips then - short term at least?
And at odds with your own views, by the sound of it.
Think I’ll be sticking to my own research, adding when H&T feels undervalued to me on a medium term basis (as it did this morning).
Re: others posters’ concerns about the impact of a weakening premium watch market, this WASN’T the main reason for retail softness in Q4.
As the RNS explains:
“New jewellery items and coins have an average price point of £73, whilst pre-owned jewellery items and coins have a higher average price point of £199, at higher margins. There was a significant trend by customers towards the purchase of new items, which we believe was price related. New items represented 62% of sales by volume in the quarter (Q4 2022: 53%) and 33% of sales by value (Q4 2022: 25%). In particular, sales of new earrings and coins (which attract a lower margin) were buoyant.
Sales of watches both by volume and value, grew in the fourth quarter by 15% year on year, at an average price point of £1,600. Margins are beginning to recover from mid-2023 levels.”
In short, Q4 watch sales were well up (even in value terms), with margins “recovering”.
The issue was with jewellery - notably earrings - & coins, where customers switched from pricier, higher margin pre-owned items to cheaper, lower margin new stock.
As posted previously, prolonged weakness/volatility in the premium watch sector could reduce H&T’s pledge book valuation. But with watches only representing 15% of pledge book, 85% of all pledges being redeemed, pledge valuations now being adjusted to improve their yield & a 65% loan to pledge ratio, this isn’t going to have a hugely material impact IMHO.