Why I’d still buy Moss Bros Group plc after today’s 15% crash

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Moss Bros Group (LSE: MOSB) has become the latest retailer to issue a profit warning following a weak Christmas trading period. 

The retailer announced this morning that due to lower footfall than anticipated during December, particularly in stores, it now expects to report a full-year profit before tax within a range of £6.5m to £6.8m, slightly below the current median forecast among analysts of £7.3m.

Like-for-like total sales for the 23 weeks to 6 January declined 0.1% year-on-year. Meanwhile, retail sales, including e-commerce, were up 0.4% on a like-for-like basis, thanks to a 12.3% increase in online sales. E-Commerce now accounts for around of 13% of group revenue, which is a relatively low percentage.

The suit hire business, which accounts for only 10% of revenue, saw a 3.6% decline in like-for-like sales though this was a marked improvement on the 8.4% decline in the first half of the year.

Unfortunately, management expects these harsh trading conditions to continue for the foreseeable future and would have an impact on profits for the next financial year as well as this one. Gross margins were down 3% year-on-year, after falling 0.7% in the first half of the year.

Unique offering 

Moss Bros is the UK’s leading formalwear retailer, which gives it a certain advantage over other retailers. With 158 stores across the country, the group’s footprint and reputation have helped it more than double pre-tax profit over the past five years. 

I believe that over the long term, this trend will continue. Indeed, buying a suit is not something that can easily be done online, which means unlike other retailers, the Moss Bros high street store portfolio should be an advantage, not a hindrance. 

Also, unlike other retailers, Moss Bros is a cash machine. According to today’s update, the group expects to end its current financial year with £17m in cash after spending on developing its store portfolio. For the fiscal year to January 28 2017, the firm generated free cash flow (after capital spending) of £7m, more than enough to build its cash reserves and distribute over £5m to investors via a dividend. 

At present, City analysts are expecting the firm to pay out 6.2p for fiscal 2018, which translates into a yield of 8.3% at current prices. Even if this target is not met, and management decides to hold the payout at last year’s 5.9p level, investors are in line to receive a yield of 7.8%. A dividend cut of as much as 30% to 4.1p would still imply a yield of 5.5%. 

Overall, considering the unique Moss Bros proposition and attractive market-beating yield, I would buy the shares after today’s 15% decline. Earnings growth might not return for the next few years, but investors should be paid to wait as the firm improves its customer offering. Over the long term, this investment should pay off, and it is likely shareholders will be rewarded for their patience. 

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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