Key points:
- Joules dropped 50% yesterday, up 12% this morning
- Next has pulled out of the investment/rescue deal
- We predicted this may well happen a month back
Joules Group (LON: JOUL) shares have not been having a good time of it and the price dropped another 50% yesterday, to then rise 12.5% this morning. In the background are the varied trading problems, the need to find more working capital, the possible loss of trade insurance cover and so on. The usual things we tend to see when a retail group's plans gang somewhat agley. But the big issue in that substantial drop was that the Next deal was borked. And we think it was borked for the reason we identified some time back – that price announcement made when the Next involvement and possible capital investment was first mentioned. For that was a hostage to fortune.
To give the business background. Joules shares are suffering from a specific retail malaise. The stock just isn't flying off the shelves. Well, that happens, groups and retail lines do go in and out of fashion. Lockdown didn't exactly advantage anyone selling through bricks and mortar stores, logistical problems after that didn't help either. Specifically Joules has blamed a warm summer for light trading of its more British weather oriented wellies and the like. Well, again, such things happen.
One further thing which has made the JOUL share price crumble is talk about credit insurance being restricted or even denied. This hugely increases the call on working capital of a retailer, as suppliers start to advance calls on cash as against supplies. Joules says it has sufficient working capital but, well, does it?
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What has led to this latest crash – the 50% of yesterday and the 33% fall in the weeks before that – is the involvement of Next in a possible rescue deal. It, quite possibly, made business sense. Shift Joules into Next, utilise their capital, their logistics system, and possibly both will benefit. But then came the next set of trading results for Joules and as we said back then in the middle of August this might bork the Next/Joules deal. As we then repeated at the end of August: Joules/Next borked.
For the original announcement of the possible Next buy-in/bailout stated that the price would be at not less than the then current market price. Which we all took to be the 33 p prevailing before the announcement. The other part was that Next might put in £15 million – that would have, at that price and that market capitalisation for JOUL, meant next taking 50% of the Joules equity or so.
Well, OK. Maybe a good deal, maybe the best that could be got, that sort of thing. But by making that in a formal announcement that meant that Next could not come back with a lower price if the situation changed. And as we can see from trading results, credit insurance and so on since then, matters have changed. The Joules share price was at 20 pence and change. So, why would Next want to put in £15 million at that 33p price they would be held to? And so the Next/Joules deal was borked- by that price announcement at the start.
As we rather said it would be and as we've said, for a month now, was possible. As Next pulled out so the shares dropped that 50%. We've a bit of a bounce today. But do note what has happened. Next cannot come back with another price – not on the stock market at least – for some 5 months now. Joules has a market capitalisation of £12 million or so. So Next just isn't going to put in £15 million to gain around 50% at a 33 p price, is it? No, the deal's borked.
