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The Mosaic (ASX:MOZ) share price comes alive, up 5%

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Mosaic Brands Ltd (ASX: MOZ) announced at its AGM yesterday it was closing 250 stores in preference for online sales avenues. Consequently, the Mosaic share price has lifted by 5.56% to 66 cents in today’s trading. This follows a lacklustre performance since the start of the week. 

Good news for the Mosaic share price?

Mosaic Brands is one of the largest fashion retail groups in Australia and New Zealand. It holds such brands such as W.Lane, Katies, Rockmans, Crossroads, and Rivers, as well as 50.1% of EziBuy.

FY20 broke four consecutive years of growth and profitability. Not a great start. However, Mosaic is in a discretionary retail sector, which took much of the brunt of the COVID-19 lockdowns nationwide. Given the year everyone has lived through, the company acknowledged the performance slump was inevitable. It was impacted by bushfires, lockdowns, the shift to online shopping and a rental spat with shopping centre landlord Scentre Group (ASX: SCG).

Since the start of the year, the Mosaic share price is down by 71%.

In particular, the company believes the shift to online shopping is both structural and permanent. Chairman Richard Facioni told shareholders:

The online shift is permanent, which has implications for the physical retail footprint and unrealistic rent expectations from landlords.

Stores are and will always remain a central part of Mosaic Brands and serving our customers. But not at the cost of unrealistic rents, nor landlord expectations that pre-date the internet.

In August we informed the market that up to 500 of our 1300 plus store portfolio nationally could be closed if realistic rental agreements were not struck.

The move online

Across FY20 the company recorded a 15% increase in online sales to just under $100 million. In the first quarter of FY21 it has already increased further by 31%. While the lock down situation in Victoria likely contributed, the company has no doubt that online sales will be more important than at any time previously.

The company has also reduced inventory by 50% in a change to operating practices. This, combined with reduced discounting and online sales has allowed it to increase margins to 67%. Up from 61.8% for the previous corresponding period (pcp). Moreover, the Mosaic Brands has decided to delay its planned acquisition of the other 50% of EzyBuy by 6 months in an effort to conserve cash. 

Foolish takeaway

The challenge of whether online sales volumes will remain permanent is an area of some debate. Nonetheless, Mosaic has already delivered a large scale increase in online sales with most of the country out of lockdown. The decision to close 250 stores seems to be recognition of this, and a tough line on costs and margin preservation. Investors appear to be happy with this prudential approach, driving the Mosaic share price upwards since yesterday.

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Motley Fool contributor Daryl Mather has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Scentre Group. 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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Daryl Mather