Specialty Fashion loses its growth appeal

While the acquisition of Rivers may have been cheap, persisting integration problems are challenging the earnings outlook.

Specialty Fashion may appear cheap after investors reacted poorly to its full-year results last month, which showed earnings growth is taking longer to arrive thanks to integration problems with the Rivers acquisition.

However, these integration problems, along with the falling Australian dollar, make investing in the discount retailer a far more risky proposition. Indeed, that's being reflected in the market, as shares in the company have slid from as high as $1.01 to today's price of 85 cents.

Rivers had appeared to be a compelling opportunity, with Specialty Fashion picking it up for a tidy $5.3 million last year. The acquisition has still proven to be cheap on all metrics. For example the EBITDA multiple of 0.56, and the payback period of less than six months. Even after accounting for an inventory write-down the acquisition can still be proven to be an absolute bargain.

However, the integration has been less than smooth. Much of the trouble has been due to the challenges of clearing the old inventory.  Moving forward there is an expectation that prices will need to be cut further, placing more pressure on earnings margins. 

2013-14 was described as a major investment period with the capital expenditure for Millers and the inclusion of Rivers. Earnings margins are expected to be impacted by both the lower Australian dollar and the impact of the price cutting at Rivers. 

Placing Rivers to one side, the other positive driver is a potential lift in consumer confidence. With the stock on a forward price-earnings multiple of 17 times, we believe it will take more than just an up-tick in consumer confidence to get the SFH share price moving again.

We have a Sell Recommendation on Specialty Fashion with a target price of $0.80.

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