The Works
a fundamental analysis
By Manuel Maurício
December 10, 2021
Symbol: WRKS (LON)
Share Price: £0,55
Market Cap: £34.6 Million
The Works is a specialist discount retailer that sells books, toys, arts and crafts and stationery products. Think helium balloons, jigsaw puzzles, board games, watercolors and brushes…
It’s not that different from Five Below, a business which I still regret not having bought during the COVID-19 crash. I wrote about it here.
The company went public in 2018 with 447 stores. The management had plans to get to 597 stores over the next 3 years and to 1000 stores over the long run.
Right now the company has 527 stores.
More stores meant higher revenue…
But lower operating income?
Wait, what?
My eyes hurt just from looking at the chart above.
Although the management was able to keep the gross margin somewhat steady…
…OK, not steady steady but at least not declining very sharply (I’m talking about up until the breakout of the pandemic)…
… they failed to run a tight operation. While the number of stores grew, so did the costs to support those stores, leading to lower and lower operating margins.
What pisses me the most is that the company even had positive comparable stores growth…
…and the stores were getting more profitable.
But as bad as this business might seem, I’m actually considering buying it.
Although I don’t expect this toad to suddenly turn into a prince, I suspect that this company is so cheap that it makes sense to invest in it.
But first things first.
As mentioned above, the initial strategy at the time of the IPO favored store growth. More recently there was a change of managers and a shift to lower store growth with a higher focus on increasing margins by reducing the promotional activity and costs (rents, freight) while making the stores more enjoyable to clients and improving the online sales.
It’s true that the minimum wage in the UK has been going up thus pressuring the margins, but the fact that the company’s rental periods are short (average lease term is 2 years) in a time when commercial rents are going down is helping the company drive down costs.
And that’s just one of the levers they’re pulling. There’s more, but I don’t think that they’re relevant right now.
Risks
- Supply chain disruptions
- Higher minimum wage
- Cost inflation
- Further lockdowns
- The demise of physical retail
Valuation and Conclusion
According to recent disclosures from the company, and after spending many hours building a detailed Excel model with all the costs, I believe that The Works could be making around £10 million in profits this year (ending in May).
The company is trading for $35 million. You can tell me what you want regarding the demise of retail, but that’s a price to earning of just 3.5x – or better yet, an earnings yield of 29%.
With.No.Debt.
Add to that the fact that the shareholders just authorized a share buyback for 10% of the company!
It’s seems too good to be true, I know.
That’s why I’m taking some time to go over my numbers again during the weekend.
You’ll be the first to know if this is indeed the great oportunituy I suspect it is.
I really like the fact that the management team understood that they should be focusing on improving ROIC rather than on growing the number of stores. It’s a well-known (kind of) financial strategy to first raise the returns on capital and only then grow the business (note that there are some businesses that get better returns exactly because they grow).
“The refocused strategy outlined in July 2021 included de-emphasising new store openings in favour of profitable digital growth and driving improvements through the existing store estate”.
Qual pode ser o dividend yield a estes preços?.
But the thing is.
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