Investec retail stock analyst’s note: Thorntons’ rebalance will continue to drive margins – buy

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Retail Times has teamed up with Investec to publish analysts’ notes on leading retail stocks. Today, Investec Securities analyst, Nicola Mallard, suggests Thorntons is rebalancing its revenues and recommends “buy” 

Thorntons has delivered PBT a little ahead of our expectations due to lower interest. It has successfully delivered all it set out to do three years ago, despite some marked changes in the underlying climate. It expects to continue to rebalance its revenues, and thus drive the operating margin higher. We make no changes to FY15E/FY16E forecasts, although note the company flags that quarterly numbers could become less predictable as FMCG grows its contribution to group sales.

  • FY14 PBT from Thorntons was £7.5m, above our forecast (of £7m) due to lower interest. EPS at 8.9p (vs forecast 7.2p) also benefited from a lower (but non-recurring) tax charge. The group had already guided on revenues, so there were no surprises here, with overall revenues 0.6% ahead with a 7.8% advance from FMCG, mostly offset by the managed decline of Retail. The rebalancing of sales generated an improved EBIT margin of 4.4% (from 3.4%)
  • As FMCG is now half of the revenue, the group flagged that quarterly numbers will become more volatile as the precise timing of larger FMCG orders can vary. Although, it still anticipates strong annual growth from this channel, it is guiding to a heavier 2H weighting, with a marked reduction in Q1 growth rates, which could result in a small negative FMCG LFL performance
  • Net debt at year-end was in line with our view at £32.9m (a shade under 2x EBITDA). The group has refinanced its banking facilities since year-end, and these now run out to October 2018. We expect a small cash inflow for FY15E
  • Having achieved what it set out to do in its three-year plan (despite some significant changes to the market), the group now looks out to the next three years, where it expects to see a continued shift to FMCG, delivering a higher group EBIT margin. We leave our forecasts and target price unchanged and reiterate our “buy” recommendation