Myopic & Irrational Views18 Oct 2023 16:44
A lot of rubbish being spouted on bulletin boards today IMHO.
Here are some key take outs:
1) SOS is not immune from the general economic malaise;
2) Shoppers currently have less discretionary spending and arguably, at least in the short-term, most spending on clothing is discretionary to a greater or lesser extent;
3) Discounting to try and increase revenues when people increasingly have a specific need and only a fixed budget to spend can backfire e.g. you're better off selling two garments at £100 than three garments at £100;
4) Discounting to increase revenues does not always boost the bottom line e.g. if you drop prices across the board by, say, 10% then you need a c22% increase in revenues (from your lower base) just to achieve the same level of gross profits, all other costs being equal;
5) SOS hasn't ruled out all discounting;
6) SOS geared up its operations, in accordance with its original budget forecasts, for a substantial increase in FY24 revenues which, as H1 progressed from Q1 to Q2, became increasingly apparent was no longer achievable;
7) Having previously committed to a more rapid expansion of sales and having recruited and trained additional staff to facilitate said expansion, SOS couldn’t just shed those additional costs immediately;
8) SOS moved from one sales strategy in Q1 to another in Q2 and I’d hazard that it probably incurred an additional c£500k-£1m of operating costs in H1 than it might have done had it anticipated that the economic climate would require this strategic change 6-18 months ago;
9) I’d also hazard that if SOS had continued to pursue a strategy of discounting to increase revenues in Q2, rather than maintaining gross margins, its operating loss would have been even higher i.e. the additional revenues would not have been able to make up for the loss in gross margin (I suspect SOS would have modelled this based on H1 trends before making the decision);
10) You have to adapt and change with the times rather than fretting over spilt milk;
11) SOS has never been shy of changing its modus operandi when needs dictate e.g. COVID, regardless of the short-term impact (SOS has always preferred to act rather than wait in hope);
12) It's clear that SOS has taken on additional operating costs to prepare the ground for international expansion and new bricks & mortar outlets (I wouldn't be surprised if these additional costs exceed £1m pa);
13) These additional (discretionary) costs can be shed further down the road if the plans do not progress;
14) The demise of the UK high street is much overstated - even Shein operates bricks & mortar outlets in the UK! (one has to assume that fashion retailers have a far better understanding of their business needs than most armchair analysts); and
15) A high street expansion in the right locations is not necessarily doomed to failure, as some like to suggest, but you have to reckon with a 2-3 year payback period
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