Topps Tiles is one of Britain leading tile company. Today’s annual result isn’t pretty because sales fell to £211m, a decrease of £3m from last year. This is despite the number of stores rising to 372 from 352.
Topps saw operating profit fell to £17.9m from £21m, but it is converting profit into operating cash profit of £22m (although this is down from £30m).
The one piece of good news from today’s result is the smaller than expected decline in dividends of 3% to 3.4 pence per share, yielding around 5%.
The outlook was surprising because investors were expecting more of the same, but management was upbeat by reporting 3.2% Like-for-Like increase in the first 8 weeks of the new financial year, up from a decrease of 0.3% in the previous period.
Before we rush to buy into optimism, let’s take a long-term view of Topps Tiles. To do this effectively, we need to analysis the following:
1). A long-term look at the company’s operating margin;
2). Productivity, regarding “per store”;
3). Dividends Coverage;
4). Market Valuation.
Topps Tiles Profit Margin has stabilised, but will there be a recovery
The latest results show Topps Tiles operating margin fell back to 8.4% from 10% last year. Going back to the 2000s, the chart shows that it enjoyed a “mini-boom” in margins as it rose from 12.5% to 22% by 2007.
From then on, Topps operating margin nosedive to a low of 7.5% by 2012, as operating profit collapsed from £47m to £15m. Investors weren’t too happy as they send Topps valuation below £40m.
But from 2013 onwards, Topps saw a “mini-recovery” as operating profit recovered to £20m by 2016. With that recovery, the share price rose from 20 pence to peak at £1.67 in Aug 2015. Then, it began a slow and steady decline towards 60 pence, as operating profit fell back to £17m in 2017.
Now with management giving an optimistic forecast of 3.2% LFL increase, will it continue for the rest of the new financial year? That is crucial because Topps Tiles it will see margin recover, as well as higher amounts of profit.
Topps Tiles sees Productivity lagging
Before today’s results, Topps Tiles saw record high turnover. Now, that sales have fallen slightly, this has affected Topps productivity.
Like Topps Tiles operating profit, it saw a mini-recovery in turnover per store from £542k in 2013 to £612k in 2016, still some way of from the £700k+ during the early 2000s. Today’s results mean sales per store fell to £587k.
With falling sales, this massively reduced the amounts of profit made on a “per store” basis. Although, profit per store recovered to £60k in 2016 from £42k in 2013. Today’s it fell back below £50k to £48k, due to a combination of higher number of stores and falling profits.
If you look back at the early 2000s, Topps was making in excess of £100k of profit per store, and at one point peaking over £150k in 2005.
Topps Tiles Dividends still depends on Dividend per share
Today’s results show the company has operating cash dividend coverage of 3.3 times. But if you refer to Topps dividend history, it depends on the level of payout.
When the shares were high during 2000-2007, their dividend policies see dividend per share (in pence) in double-digits, before cancelling the dividend altogether in 2009. The cash dividend coverage was regularly below two times.
After 2010, it re-introduced their dividend, but a payout of 1 to 2 pence per share helps Topps to maintain its high coverage. As dividend per share rose towards 3 pence, that coverage began to fall.
One would expect Topps to return to their progressive dividend policy if trading maintains their positivity.
Topps Tiles Market Value
Today’s result showed that Topps PE ratio rose to 9.5 times earnings from 7 times. And EV/EBIT rose to 8.5 times from 6.8 times.
Investors are hoping that valuation will rise because the positive LFL growth would increase operating profit. If profit increases, then expect to see Topps multiple to increase. Both these outcomes will push the share price higher.
Final Thoughts: Topps Tiles
Despite the positive outlook from management, it’s a little too early for investors to remain optimistic for the rest of the year. I can see the share price popping towards 80 pence in the short-term (the next three months). But for the momentum of the share price to rise it must report positive LFL of over 2-3%. If so, then expect Topps share price to approach £1.
Investors must remember that Topps is highly cylindrical and any disruption from the UK market, especially the volume of transactions would affect Topps business.
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The above analysis is based on my opinion and nobody else. It does not constitute professional investment advice. Data is correct on at the time of availability. I don’t hold the company’s shares unless stated.