I came in for a fair bit of criticism when I covered Indian fashion retailer Koovs (KOOV) negatively and suggested it was a sell or avoid back at the start of July. Since then the share price has pretty much halved from the 20p level that it was trading at, so I feel that my criticism of the company was justified, and my view has been vindicated – hopefully some of you who have read my articles and were holding at the time also saved yourselves from seeing the value of your investment halve. A number of people have been asking me what my view is of the company now that the share price has dropped back to around 10.6p to buy, so I felt that it was time to take another look.
I have never been a fan of Koovs - although for a while the market disagreed with my assessment and the share price soared - as I’ve always struggled to see how the business model worked, when so much cash is having to be injected and the returns from that investment don’t appear to justify the expenditure. People will point to the deals with HT (Hindustan Times) Media and Future Lifestyle Fashion, but I would argue that both were of far more benefit to the third party than they were to existing investors. The deal with HT Media is for advertising services in return for equity, with £17.1 million being paid in shares in four tranches over four years, along with £6.9 million in cash over the same period. This will of course reduce the eyewatering amount that Koovs has been spending on advertising and marketing in terms of cash burn, that comes at a price when the market cap of the company is just £33 million. It means that when the next tranche of shares is issued for advertising services in August 2019, then the £4.28 million payment in shares would represent dilution of around 13%, based on the current valuation – although I know a lot can happen in the meantime. The first tranche has been issued at a price of 10p.
The equity part of the deal is based on a three month average closing share price, so potentially it has an element of ‘death spiral’ financing to it, especially as HT Media will have to offload shares along the way to remain below 30% during the term of the deal – I would guess that it’ll cash in as much as it can along the way anyway as and when each new tranche of shares are issued – there certainly doesn’t seem to have been any TR1 major holdings notification from HT Media. The company also recently raised just under £5.8 million via an investment by Future Lifestyle Fashions, also at 10p, yet there has been no TR1 notification for this either, so it remains to be seen whether or not Future still owns all of the 24.8% of the company that was issued to it. A further £12 million net came via a placing at 15p, with chairman Lord Alli taking £1.5 million worth of shares.
If we now move onto the recently released final results for the year up until March 31 2018, we can see that revenue in that period was down considerably compared to the previous year – £6.35 million compared to £8.68 million – which is rarely a good sign for a company supposedly at the growth stage. That resulted in a net loss of more than £15.3 million, and although lower than the £19.2 million loss for the previous year, it came during a period in which the company was supposed to be saving money! Operating expenses were an eye-watering £12.8 million, and of that nearly £7.8 million was spent on marketing. The previous year the marketing spend was £12.7 million, so if the company intends to once again ramp up its marketing activity I’d expect it to return to those levels or even higher. So even though the company is now sitting on maybe £15 million – being generous when taking into account cash burn plus the cost of the equity raises – that will probably only last it a year at best, even when taking into account the HT Media credit. That certainly doesn’t give it long to turn things around, and based on past performance, throwing a load more money at marketing is no guarantee that it will be a success this time – especially when you take it alongside falling sales revenues.
Even though the share price has dropped back a long way I still wouldn’t be tempted at this level, as it is only cheap if the company can actually turn the business around and prove that the model works. It would be far more prudent to wait for positive signs that things are heading in the right direction – if they ever do – and then invest, even if the share price is higher, as at that point it will have been proven that the business is actually viable rather than just a money pit.
Filed under: Koovs, TrakM8, Xeros, Woodford dog, Dunelm, FireAngel, redT Energy, share spreads
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