Monsoon has announced annual pre-tax profits of GBP58 million, a decrease of 2% on last year, disappointing considering the potential of its Accessorize chain. Chairman Peter Simon has indicated that he intends to spin off the growing international division in a move which will undoubtedly be opposed by minority shareholders.
Monsoon blamed its profit decline on the integration of the 43 Etam stores it acquired last year. The company found the integration more difficult and costly than predicted and, given the challenging trading conditions in 2005, the lowest growth year in retail for many years, it had an inevitable impact on margins and made a considerable dent in its cash reserves.
However, bearing in mind that the fashion trend last year, the 'boho gypsy', 'Indian' looks, fits so well with Monsoon's ethnic inspired clothing range, it is surprising it has not released a better set of figures. The Accessorize arm in particular should have performed well as the accessories market is still outperforming all the clothing sectors.
This suggests the company is reaching maturity in the UK - its core market and where it derives 89% of its revenue. Having enjoyed good operating margins of well over 15% for many years, its UK margin dropped to 10.6% in 2005/6 as a result of flat sales and the cost of expansion.
On the other hand its international division outperformed, with an operating margin of 22.6%, nearly double that of the UK's. Monsoon has a distinctive brand with wide appeal and growth potential in many markets. Alongside this the Accessorize brand has even greater potential. Therefore it is logical for the company to capitalize on this and push for yet more international expansion.
Yet chairman Peter Simon, who owns 75% of business, has claimed "increasing concerns" regarding revenue streams from volatile markets such as Russia. However, the majority of its international expansion is through franchising which takes away a large degree of risk. His view needs to be balanced against the strong growth opportunities and margins available in new markets.
It is not surprising, therefore, that the shareholders are unhappy at the suggestion Mr Simon intends to hive off the international division and take it private, leaving them only with shares in the UK business.
Source: Verdict Research