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dabozza

724 Posts.

1087

13/07/22

12:04

Post #: 62512936
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Originally posted by madamswer: ↑

"Not sure if onlineretail is your thing @madamswer but currently researching STP - StepOne Clothing."

@Mr-Chow,

Not only is retailing not my thing (too competitive for my liking, also too ethereal for me to know what retail concepts will work and what won't), but online retail is even less my thing.

I did look - briefly - at STP when it downgraded in May and came away thinking, "Another one of those shallow-moat, low-walled, virtual companies with few enduring qualities".

I hear what you say about the stock trading at NTA, and note that its a pretty clean NTA, with almost 40% of NTA being inventory, which, as you rightly point out, is carried at cost.

The problem I have is not what NTA looks like today, but what it might look like in 12-months' time and whether it might actually be eroded by losses.

I'm aware that second-half years are probably seasonally weaker for STP, but for internal expectations to go from $7.5m EBITDA for JH2022, to EBITDA breakeven, within the space of just 12 weeks, per the update in May... that's some serious delta.

And that's even before the cost of living and interest rate hikes have taken effect.

Maybe it's just me, but a >80% Gross Margin, derived from selling undies for $33 each?!
Who on earth pays that?

Not just that, but - more importantly - when CoGS rise, which they are doing, what's going to make those people pay more to sustain that >80% Gross Margin.

Sorry about the buzzkill, but my very strong sense is that the world has changed over the past 6 months, meaning the next few years are going to be very different to the past decade when it comes to investing.

For a long time, cheap money and imported deflation has seen retailing over-earning, and caused many pretty ordinary businesses to come into being (not just retailing but in many economic sectors)...businesses that now will no longer be enjoying the free kicks of "everyone is a winner" macroeconomic tailwinds; and many of them will not survive.

I'm not saying that STP will not survive, but I fear it will end up being a value trap.

The world in which we currently find ourselves feels to me very much like it felt when I was first learning about investing (which was at a time when inflation was also a big deal); the mentors I had at the time all impressed upon me the need for pricing power.

Over the past 15 or 20 years, the notion ofpricing power had been relegated by investors to a subordinate consideration, becoming almost a quaint investment relic. When CoGS are static (or even deflating due to outsourcing of manufacturing to China), then even half-baked businesses are able to garner half-decent margin.

But for companies that have little control over their now-inflating CoGS, pricing power is now once again a critical consideration, and the reality is that very few companies actually possess it. I very much doubt that this penny has dropped for vast swathes of investors.

Does STP have sufficient brand equity that affords it pricing power?
Not sure, because that brand value hasn't been tested.

But I struggle to invest in something that is untested.
As you say, "...the question mark is whethertheir business model can thrive going forward as their advertising costs are40-45% of revenue and slight changes in advertising return metrics can heavilyaffect end result earnings"

PS. As for the founder owning a significant stake in the business, some context is useful here: remember that he took a cool $40m off the table as part of the IPO so while his remaining stake in the business is worth around $30m, he and his family are not going to be living under a bridge if the business doesn't perform well going forward.

Expand

I've just found this thread and really enjoyed reading through it. Thanks @madamswer in particular for your thoughts on current opportunities and your portfolio. I wanted to delve a little deeper into one of your comments, if that's OK?

"Conversely, if a stock is assessed by me to be fundamentally cheap, I buy it no matter what the prevailing "sentiment" is at the time. By way of demonstration, from a sentiment point of view, things look really bleak right now, but it is that bleakness which makes some truly wonderful businesses - the likes of ARB, BRG, CAR, CSL, COH, JHX, REA, REH, RMD, XRO - become available at prices far lower than they would other wise have been."

In your current research, I noticed you did not include healthcare or other "defensives" (not a fan of that term). Yet, in the quality bucket, you have a few healthcare companies, such as CSL, COH and RMD. Personally, I'm a big fan of CSL, though I find it generally trades at 'Quality at Any Price' levels rather than at 'Quality at a Reasonable Price'. I understand that the current valuations for these quality companies still remain too high for value investors. However, with the current conditions in the market, and large parts of the healthcare sector being down up to 75%, are you not interested in looking through the rubble for value opportunities in other parts of healthcare?

VDU.
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