Has embattled women's apparel retailer Specialty Fashion Group Ltd. (ASX: SFH) finally given a glimmer of hope to long-suffering shareholders?
The company revealed another disastrous profit result with earnings before interest, tax, depreciation and amortisation (EBITDA) tumbling 48.1% to $20.3 million even as revenue for the year ended June 2015 jumped 15.5% to $791.5 million.
The news drove the stock down 4.4% to a three-month low of 55 cents and we can thank its underperforming Rivers brand for the poor outcome as EBITDA would be double what it was if not for ongoing losses from this division.
There's more bad news still. Record low interest rates and the big drop in fuel costs are not prompting shoppers to spend more at Specialty Fashion's stores while gross margins have fallen to 58.6% in 2014-15 from 63.1% in the previous year due to heavy discounting at the Rivers stores as management tries to clear unwanted inventory.
The weakening Australian dollar is also not helping given that the group sources its products overseas, although its currency hedging program will give it some protection as the group achieved an average exchange rate of US91 cents in 2014-15 and will achieve an average rate of US79 cents for the current financial year.
It's little wonder management has decided not to pay a final dividend in the face of these uncertainties. The last time Specialty Fashion paid a dividend was a year ago.
However, there are signs that conditions have bottomed for the group. Management said it expects an improved result in the current financial year and is confident that Rivers will become profitable by 2016-17.
What's more, Specialty Fashion's other brands such as Millers and Crossroads are performing well with same-store growth (excluding Rivers) of 5.3% for 2014-15, compared with -0.7% for the previous year.
Its online business is also growing rapidly as internet-based sales surged 64% to $51.2 million for the year to account for 6.5% of total sales, while its total store network shrunk to 1,086 from 1,095 stores as the number of store closures exceeded new store openings for the year.
If trading conditions are set to improve from here as management is tipping, there's plenty of upside for the stock which has nearly halved in value over the past year as it became apparent that Rivers would take longer than expected to turnaround.
The stock is only suited for longer-term investors with a high tolerance for risk.
Management bought the distressed Rivers business in late 2013 for what appeared to be a bargain price of $5 million. Clearly, Specialty Fashion's share price would be much higher than where it is today if not for the acquisition.
Let's hope Rivers turns out to be short-term pain for long-term gain, although the jury is still out on this.
