Today I'm going to look at the latest trading figures from two small-cap retailers that appear to offer significant upside potential.
The next Boohoo.Com?
Shares of flash sales retailer MySale Group (LSE: MYSL) have risen by 186% over the last year. Today's trading update shows revenue rose by 18% to A$126.5m during the final six months of 2016. Earnings before interest, tax, depreciation and amortisation (EBITDA) rose by 100% to A$3m, beating expectations.
Today's figures put the firm on track to deliver forecast revenue of A$275m this year and to potentially beat full-year net profit forecasts of A$1.76m.
MySale's main market is Australia, where it operates a flash sales stock clearance business and is starting to sell its own bought-in stock. Customer numbers rose by 19% to 870,000 during the second half of 2016. A greater proportion of full-price stock lifted the group's gross margin by 2.7% and pushed gross profit up by 17% to $38.4m.
A second attraction is that MySale now appears to be generating cash. The group's net cash rose from A$27.5m to $A29.1m during the last six months.
Is this the right time to buy?
Investors who picked up MySale shares when they dropped below 50p in 2016 will be pleased with today's results. But the shares have tripled since then and the stock currently trades on a 2017/18 forecast P/E of 273.
Clearly the business needs to grow into this valuation. But if profit margins and sales continue to rise, I believe the firm's profits could easily double or triple over the next 12 months.
MySale's valuation is too rich for me, but I can see the logic in buying a small stake in this stock, with a view to holding for the next one or two years.
A high-yield value play
If you prefer to focus on value and income instead of growth, then womenswear value retailer Bonmarche Holdings (LSE: BON) may be of interest. The group's shares have fallen by more than 50% over the last year, but rose by 4% this morning, after the firm reported an increase in sales in the run-up to Christmas.
Bonmarche said that like-for-like store sales rose by 0.8% during the three months to 24 December, while online sales fell by 3.8%. Overall sales rose by 3.3%, thanks to a number of new store openings.
Chief executive Helen Connolly admitted that the fall in online sales was "poor" and said this remains "a key area of focus". I think today's figures are encouraging, although it may still be too soon to be sure that a turnaround is underway.
The question for investors is whether Bonmarche is value buy, or a value trap. The shares currently trade on a forecast P/E of 6.5 and offer a prospective dividend yield of 8.8%.
An ultra-cheap valuation like this usually indicates that the market is sceptical about a company's ability to deliver.
Today's trading update confirmed previous guidance for adjusted pre-tax profit of £5m-£7m this year. That's encouraging, but my calculations suggest that this level of pre-tax profit is likely to result in after-tax earnings below consensus forecasts for 12p per share. I think a figure of 8p-10p per share is more likely.
My view is that Bonmarche shares are fairly priced at the moment, but have significant potential as a recovery play.
This small-cap could rise by 58%
Before you make any trading decisions, I'd urge you to consider this specialist retail stock. Our analysts' valuation of this business suggests that the stock may offer 58% upside from current levels.
To help you decide, we've produced 1 Top Small-Cap Stock From The Motley Fool. This exclusive new report contains full details of our experts' analysis and price guidance.
Best of all, this report is free and without obligation. For immediate access, simply click here now.
Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended boohoo.com. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.