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Why the Mosaic Brands share price rocketed 10% today

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The Mosaic Brands Ltd (ASX: MOZ) share price was up nearly 10% today following the announcement of a buyback by the company.

Mosaic is one of the largest specialty fashion retailer groups in Australia, with brands such as Noni B, Rockmans, Millers, Katie’s and Rivers all under its banner.

This afternoon, Mosaic announced the initiation of an on-market buyback of up to $10 million worth of shares. The buyback will take place between 20 February 2020 and 19 February 2021. 

Buyback details

The buyback is being employed as a capital management tool based on the strength of the company’s balance sheet and anticipated positive future earnings growth. The strategy will utilise Mosaic’s surplus capital to increase earnings per share and return on equity.

Mosaic will fund the buyback from existing cash reserves. Based on yesterday’s closing share price of $1.62, the aggregate buyback amount would equate to 6.38% of Mosaic’s issued capital. 

The maximum number of shares Mosaic is permitted to acquire in the on-market buyback is 9,681,293. This is 10% of the lowest number of shares on issue during the previous 12 months. Accordingly, the buyback will not require shareholder approval.

Major shareholder Alceon Group Pty Ltd has indicated it will not participate in the buyback. Alceon Group currently holds nearly 36% of shares in Mosaic. If Mosaic acquires the maximum number of shares permitted under the buyback and Alceon Group does not sell any shares, Alceon Group’s shareholding will increase to 39.7% of shares in Mosaic. 

Trading update

In January, Mosaic issued a trading update for H1 FY20 which sent shares crashing lower. In the update, Mosaic advised that sales in the second half of November and December had been significantly impacted by the bushfires.

Comparable sales for the the half were 8% lower than the previous year. 20% of Mosaic’s 1,386 stores have been directly impacted by the bushfires, and some 32% of stores are located in regional areas where consumer confidence has been particularly fragile.

In the update, Mosaic anticipated second-half earnings would demonstrate higher growth relative to FY19, particularly given the external factors that impacted first-half revenue. 

Mosaic advised that underlying earnings before interest, tax, depreciation and amortisation (EBITDA) for the first half was anticipated to be in the region of $33 million. This would be up around 13% from EBITDA of $29.1 million for the prior corresponding period. EBITDA after non-recurring project costs was expected to be around $32 million, up 36% from $23.5 million. 

Mosaic has been focused on improving gross margin over sales given the challenging retail environment. Comparable sales for the period to the end of October were down 4%. Gross margin, however, increased to 59% from 56%. This was driven by cost price improvements and a more disciplined approach to discounting. 

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Returns as of 6th October 2020

Motley Fool contributor Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Kate O'Brien