Market darling (and not without reason) Next (NXT) reported this week that it had beaten expectations, courtesy of better-than-expected sales in the first quarter. It’s held up as the poster child for its detail in its communications to the market, and takes the time to explain how the business is performing as well as what investors can expect in future.
It’s one of the few retailers that is performing strongly, and with pre-tax profit margins of 19 per cent it’s easy to see why this business is the sector favourite. But just because a retailer is a favourite now doesn’t mean it always will be. Remember, Tesco (TSCO) was once a market darling because of its fat profit margins and rollout of out-of-town shopping centres, meaning it could increase the space of shelving and ramp up stock-keeping units (SKUs), as well as charge ‘back margins’ by offering suppliers preferred retail shelf space, such as close to the checkout or at the end of an aisle.
But Tesco’s profits were high because discounters didn’t exist and shelf space was finite. Along came the internet, which made shelf space unlimited, and instead of responding to the discounters with a war on price to drive them out of business, the Big Four supermarket management teams showed their naivety. They refused to abandon the golden goose that had served them so well in prior years but was no longer golden. The financial crisis hit, and Tesco opted to keep prices high, citing inflation. This instead drove shoppers into the welcoming arms of Aldi and Lidl. And supermarket shares have never been as profitable since.
Miniso: the new retail threat?
And now there is a new threat in town… Miniso. Although the retailer came to the UK in 2019, it now intends to expand significantly beyond the 23 stores it had at the end of last year.
Miniso focuses on Japanese design, and is the physical equivalent of Temu or Shein, which have both ravaged the ecommerce industry with ridiculously low prices. It doesn’t seem to matter that customers sometimes need to wait weeks for products to be delivered from these discounters, which is at odds with Amazon’s (US:AMZN) focus on increasing the number of orders it ships to next-day and even same-day delivery.
This can be seen in the data. Temu took just over a year to get to 51mn US monthly active users. By contrast, Amazon has 67mn, so still some way away, but we must remember Amazon’s growth has taken decades.
Both Asos (ASC) and Boohoo (BOO) have been victims of competitors eating their lunch, coupled with a cost of living crisis and increased freight costs, which have resulted in their share prices being close to 15-year and seven-year lows, respectively.
So, what does Miniso’s growth mean? Well, retailers should be scared. Customers have shown their loyalty is towards price and not brand. And a retailer stacking up shelves with cheap foreign goods (assuming the quality is good enough) is a credible threat. I’ll always put the chart over fundamentals when it comes to a trade, but Miniso should not be ignored. If it’s here to stay then it’ll be a continuous thorn in the side of the retailers – much like Aldi was and is. It pays to keep companies like this on your radar.
Why Filtronic is now on my radar
One company that recently came onto my radar though is satellite internet engineer Filtronic (FTC). This is because last week it announced a new strategic agreement with SpaceX's Starlink platform. SpaceX is owned and run by Tesla chief executive Elon Musk.
On top of that, a trading update stated Ebitda (earnings before interest, tax, depreciation and amortisation) would be “significantly ahead” of FY2024 and FY2025 expectations, too – so a multiple profit upgrade. I am not much of a fan of Ebitda, but the forecasts in profit for those years have been driven upwards to £2.95mn and £6.15mn, respectively.
It’s easy to say that the stock price is now up with events (and I would not argue otherwise) but companies that often beat expectations continue to do so in what is known as an earnings upgrade cycle. It’s not guaranteed, but Filtronic is now working with a company focused on growth. If Filtronic can deliver, then hopefully that means continued work. Indeed, warrants have been issued to SpaceX conditional on future work being contracted.
Looking at Chart 1, we can see that Filtronic struggled to gain any real momentum for much of the past decade.
After a sharp fall in 2019, and another in what is now known as the 'Covid Crash', the shares have slowly ground higher, with much of the time spent trading in a range.
Moving onto Chart 2, we can see that the stock is now in a stage 2 uptrend. Note the volume on the right-hand side of the chart ramps up as the stock broke out and went vertical.
I have been holding Filtronic since the announcement, and I am looking to average up and increase my holding should the stock consolidate and form a new base. Plenty of profit has been made quickly and so consolidation allows those holders to bank profits and create the opportunity for new shareholders to join the register. Churning through holders in this way allows the stock price to reset and stabilise before any potential leg up.
Of course, there’s always the possibility that the stock continues its journey upwards without consolidating, as buyers are eager to join the growth story that is unfolding. If that’s the case, I won’t add to my position just yet. Despite already being in profit, I still only average up when the risk to reward is in my favour and that would only be from a clearly defined base breakout. This company deserves a spot on your watchlist.
