haunted by tax gremlins with weakness on the cards (WRKS)

By Patricia Miller


Discount retailer (LSE:WRKS) could provide a short strategy for spread-bettors.

The children’s toys and book seller was founded in 1981 and floated on the FTSE Fledgling main market in July 2018 with a value of £100 million. In the 18 months since the IPO the stock price has taken a battering, and the firm is now valued at just £30 million. 

To make matters worse, the bottom of a 16 January RNS trading update for interim half year results to 27 October 2019 suggests that all is not well in the tax side of the business either. The UK tax office (“HMRC”) is looking into whether paid enough duty on imported stationery, canvases and toys over the course of three years. 

There is considerable uncertainty as to the potential implications of this additional tax liability. In total, $19 million of imported goods falls under the HMRC review, but has currently paid zero duty on this stock.

Meanwhile, bosses said they had made “a provision for underpaid duty of £350k”, with “a reasonable expectation that this amount will become payable”. However, they argued that they cannot determine a reliable estimate of any “further potential obligation” at this stage. 

Based on our initial observations the additional expected liability is expected to be up to £500k,” the company added, somewhat worryingly.

Expansion? What expansion?

While hailed record Christmas sales, apparently up 1.5% in the 11 weeks to 12 January against “tough comparatives and a difficult consumer backdrop”, it also posted an adjusted EBITDA loss of £4.3 million. The reality is that this number could be far higher. Across the full 26 weeks, sales were actually down by 1.9% compared to the same period last year. 

Digging a little deeper shows structural imbalance in the business fundamentals that may be a longer-term cause for concern. 

For example, chief executive Kevin Keaney oversaw the opening of 50 new stores from 2018 to 2019, taking’s cost base up to 497 stores. That strategy has come to an abrupt halt, suggesting that WRKS is shipping money at an accelerated rate. Meanwhile, profits are relatively tiny compared to revenue: year-end results show that pre-tax profits sunk from £2.57 million on revenues of £192.1 million in 2018, to profits of £2.33 million on higher revenues of £217.47 million for 2019.

Instead the strategy for the months ahead will shift towards cost-cutting. Lots of cost-cutting. As put in in its recent update: “No further net new store openings [are] planned for the rest of the current financial year”. The firm also highlighted its “increased focus on cost control”, with store labour and administrative costs (read: potential job cuts) retail distribution, property costs and discretionary spending all being targeted for the chop.

On 16 January, the company confirmed Keaney was out after a year and nine months to be replaced by chief financial officer Gavin Peck. Peck has a struggle ahead of him, that’s for sure. News of Keaney’s departure was greeted with a massive 54% hike in the WRKS share price from 31p to 48p but I would wager that those gains will be erased in the medium term.


Author: Patricia Miller

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

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