Menswear company Moss Bros (LSE: MOSB) has slumped by over 20% today after it released a profit warning. The company has experienced a number of challenges in the current financial year, with its supply chain causing problems alongside weaker demand from consumers.
Looking ahead, the company expects those issues to continue in the near term. However, could it now offer strong turnaround potential for the long term?
Difficult period
Moss Bros has reported that it expects profit for the year to 26 January 2019 to now be materially below current market forecasts. Part of the reason for this is material short-term issues with the availability of stock. This follows the consolidation of the company’s supplier base in response to sterling weakness. It has affected all of its categories and is set to continue to having a negative effect on sales until late spring.
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In addition, consumer demand has declined. Hire sales continue to be challenging, while the reduction in-store footfall which started in the latter part of 2017 has continued in the new calendar year.
Despite this, the company continues to invest in its long-term growth prospects. Notably, it is increasing investment in its digital offering, as well as in areas such as the customer experience. However, it has decided to change its dividend policy, and it is recommending a total dividend for the full year of 4p per share, which is less than the previous year’s 5.89p per share.
Turnaround potential?
Clearly, a turnaround is possible. Moss Bros seems to have a sound management team which has put in place a sensible strategy to put the business on a firmer footing for the long term. However, in the near term its problems seem unlikely to change significantly, and they could cause further downward pressure on its financial performance. Therefore, while now a relatively cheap stock, it could become even cheaper over the coming months.
In contrast, fellow retailer Morrisons (LSE: MRW) seems to be a strong turnaround candidate. Its recovery plan is on track, with it having made excellent progress in reducing net debt while also generating new, low-capital growth initiatives. For example, it has focused on leveraging its food supply division, which provides it with significant growth potential for the long term.
In the last two years Morrisons has been able to record positive earnings growth. This is set to be repeated over the next two financial years and could help to improve investor sentiment.
Certainly, the downbeat UK consumer outlook may cause investor sentiment to be held back to some extent over the medium term. But with a sound strategy which has still not yet had its full impact on the company’s operational and financial performance, further share price growth could be ahead over the long run. As such, now could be the right time to buy it.
