Shares in TheWorks.co.uk (WRKS) crashed 43% lower to 44p on Thursday as the cut-price gifts, arts, toys and books seller posted another profit warning, leaving the stock languishing well below its 160p, July 2018 IPO issue price.

Recent like-for-like sales haven’t improved as much as hoped. And with management also taking a cautious view on Christmas, the company warned full year pre-tax profits are expected to come in ‘significantly below’ the current consensus of £7.3m.

SQUISHED BY SPENDING SQUEEZE

Chief executive Kevin Keaney bemoaned a consumer environment that ‘has remained challenging’, explaining that The Works has been ‘trading against strong comparators’ following last year’s Squishies ‘Mega Trend’; a Mega Trend is defined by the company as a product or collection of products whose sales exceed more than 3% of weekly sales for a temporary period.

Keaney insisted The Works has ‘responded decisively to minimise the impact to our performance and are benefiting from easier comparators in the second half’. He is looking ahead to the busy Christmas period ‘fully prepared and ready to deliver for our customers with a fantastic selection of good quality and great value products.’

STEPPING UP PROMOTIONS

During the half to 27 October, total revenue rose 5.4%, although even stripping out the impact of last year’s Squishies fad, like-for-like sales were down 1.9%, the value retailer unable to escape tough UK high street conditions and having to step up promotions to drum up business.

While like-for-like sales have improved in recent weeks, they weren’t at a level previously hoped for by management and the full year performance depends on how the business trades over the next six weeks in the run up to Christmas.

READ MORE ABOUT THE WORKS HERE

The positive news is The Works remains confident about its Christmas offering, including new products such as Frozen 2 merchandise, and like-for-like sales are expected to improve in the second half given a softer performance for the same period a year ago means the company has a lower bar to clear.

Furthermore, The Works is pressing on with its store roll out strategy, arguing ‘the current high street environment creates opportunities, with the structural shift in the retail sector resulting in a strong pipeline of affordable, good quality retail space.’

THE EXPERT’S VIEW

AJ Bell investment director Russ Mould said: ‘The Works warned in July that like-for-like sales growth was likely to be below recent historic levels in the absence of a new mega trend and given the current economic environment. That’s remained the case and so we have another profit warning.

‘In its defence, the company knows its target market, it provides products at attractive prices and it is finding ways to have more efficient operations such as outsourcing e-commerce fulfilment and warehousing to a third party.

‘Unfortunately there is nothing unique about the business and competition is fierce offline and online. That leaves it running hard just to stand still. Unless market conditions radically improve this may not be the last time The Works delivers bad news to investors.’

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Issue Date: 07 Nov 2019