Brait FY numbers - New Look priced at zero

Yesterday Brait released their 6-month trading update which has been keenly awaited due to their poor performance over the last 18-months. Since January 2016, the stock is down 70%. In February, after management wrote-down the New Look asset by R10 billion to R8 billion, I said most of the pain from New Look had been felt. I was wrong. Management has now written off the remaining R8 billion, so that their carrying value of New Look sits at zero. Due to the further write-down, Brait's NAV now sits at R66.62 per share. A 36.6% decline since September 2016.

A quick observation about the Brait share price. If you bought in 2012 you are still up 130%, which in most peoples books is a good return. See the graph below, where I drew a line from starting share price to the current share price. It doesn't look too bad? This is of little consolation if you bought in the last 2-years. It highlights though, your perception of a company and their performance is heavily influenced by when you bought.



Moving onto the numbers, we will start with New Look. Revenue was down 4.5%, life for like sales were down 8.6%, third-party e-commerce sales were up 17% and interestingly their own e-commerce sales were down 7.6%. The company says it best of what has gone wrong:

- its product positioning had moved away from its successful broad appeal, becoming too young and edgy.
- its customer messaging had become overly fashionable and in the process, no longer highlighting New Look's value proposition;
- excessive product options and increased complexity throughout the organisation resulted in the business being late to certain trends and as a result not clearing ranges by season end;
- reduced flexibility and speed as well as an increased cost base.

Management has a strategy to turn things around, which they say won't have a significant impact until next year. Going forward the carrying value of New Look can't hurt the Brait NAV but if Brait needs to put fresh capital into New Look that will have an impact. My rough calculations at the current run rate, New Look will have a couple of years worth of cash, so it doesn't look like Brait will have to pony up anymore for now.

Their other operations look solid though. Premier had a tough time due to the drought, which pushed down their profits. Their biggest asset, the Virgin Active gyms saw revenues increase and margins expand. Over the last year they added 17 new gyms, with more in the pipeline. Lastly their third biggest asset, Iceland foods, who are the leaders in frozen meals in the UK also looks to be on track. They are busy shifting to meet the changing consumer demand for instant and easy meals. Currently they are delivering 40 000 meals a week.

What to do with Brait? Currently the share trades at a 30% discount to the NAV, which is a big safety net; their other assets all look solid and are well-known brands. What is more likely, the share price going to R90 a share or to R22 a share? All things considered, it is more likely to go up than down.