This week I am looking at McColl’s following the announcement of its interim results on Monday 24 July. McColl’s is a leading neighbourhood retailer with 1,650 stores across the UK and the results mark one year since it announced the acquisition of 298 convenience stores from the Co-Op; a deal that has accelerated its shift away from being a traditional newsagent towards being a full-blooded convenience store retailer.
On the plus side, results show that like-for-like sales were up 0.2% for the first half of the year and 1.4% in the second quarter – a good result considering that like-for-like sales had hitherto been in negative territory for an extended period. The Chief Executive, Jonathan Miller, highlighted McColl’s focus on the relatively robust convenience market and the IGD forecasts that the UK convenience market will grow by 12% between 2016 and 2021. McColl’s hopes to benefit from this growth while continuing to grow its footprint and improve its in-store offering through better product ranges and the addition of more services (such as post offices and online shopping collection points that help drive customer footfall). On the downside, the food retail market remains very competitive and larger supermarkets also remain focussed on improving their convenience store offering. This competitive market may at some point drive negative like-for-like sales again, which can in turn hurt margins.
At the current valuation the shares do not look expensive and successful integration of the Co-Op stores should deliver attractive earnings growth. However, the increased debt as a result of the store purchases does leave the company more vulnerable in the short term should the UK economy suffer a downturn.
This week I am focusing on McColl’s Retail Group, the UK-based convenience store retailer with a strong focus on neighbourhood locations (rather than high streets).
Since the early 2000s, McColl’s has been shifting away from being a traditional newsagent and towards convenience food and wine, a market that has been is growing at around 5% per annum due to demographic and structural lifestyle trends. Part of its strategy to grow faster than the market includes converting its existing newsagents into more profitable convenience stores. On top of this, the business has been expanding via the regular acquisition of new stores from independent operators. Today, McColl’s is the second largest operator by market share within the convenience retail space (behind Tesco).
In order to further accelerate its diversification away from its legacy newsagents, McColl’s recently announced a £117m deal to take over a portfolio of nearly 300 convenience stores from Co-op. The CEOs of both groups view the transaction to be in line with their respective strategies: according to Jonathan Miller of McColl’s, the size and location of the stores are perfect for its operating model; and Co-op’s Steve Murrells comments that the stores being sold are too small to accommodate all the firm’s own-brand products.
Investors have thus far received the news positively. Indeed, expectations are that the acquisition will quickly become earnings enhancing thanks to the enlarged economies of scale and synergies from a leaner operating model. The deal is expected to conclude in November (it is still subject to approval from the Competition and Markets Authority) and investors will then be keeping a close eye on how efficiently management are able to integrate the new stores.
This week Oliver Phillips focuses on McColl’s Retail Group…
Stocks in Focus: McColl’s Retail Group
Royal Mail grabbed the headlines at the end of 2013 for being publically floated on the stock market for the first time. Indeed, whilst not many are as well-known or widely publicised as the Royal Mail, these initial public offerings (IPOs) happen fairly regularly and we often take a closer look at companies coming to the market to see if they are offering an opportunity to long term value investors.
Last week took a look at the McColl’s Retail Group IPO. McColl’s is the second biggest player (behind Tesco) in the UK convenience store market, which is growing at around 5%pa thanks to demographic and structural lifestyle trends. Traditionally these have been in the form of newsagents, but as newspapers are a declining business the shops have become orientate towards essential foods and wine. The business hinges on convenience, as typically prices will be higher than supermarkets; however people would rather walk to the local McColl’s then drive to the supermarket. In order to grow faster than the market it is adopting a three-pronged strategy: converting some of its existing stock of newsagents into more profitable food and wine convenience stores; converting some of its standard convenience stores into more profitable “premium” stores with a wider variety of products and competitively priced own-brand options; and the acquisition of independents. Beyond this the group attempts to differentiate itself from the competition through location (its stores are typically located in neighborhoods rather than high streets) and integrated services ((e.g. Amazon collection points, Post Offices, PayPoint) that drive footfall.
There can be several reasons why a company may choose to raise money by floating shares on the stock market. In the recent IPO of McColl’s Retail Group, the main reasons were to reduce expensive debt, allow for increased capital expenditure for its growth strategy, raise the overall corporate profile of the group and provide an opportunity for existing shareholders to realise value.