Is this turnaround stock a falling knife to catch after dropping 15% today?
Shares in online retailer Koovs(LSE: KOOV) are sliding again today after the company reported yet another weak trading update.
The firm, which is trying to become "the leading fashion destination in India" via its Koovs.com website, reported a pre-tax loss of INR 1,691.3m or £19.3m for the fiscal year ending 31 March 2017, up from the previous year's loss of £16.7m.
Losses increased despite a 65% increase in sales order value growth for the period to INR 1,616m or £18.6m. However, these headline figures are misleading as they only reflect sales value. The actual revenue generated by the firm during the period was INR 760.9m or £8.7m, giving a gross loss of INR 294m or £3.3m, up from £2.4m last year.
Since the company's IPO in 2014, shares in Koovs have lost 82% of their value and looking at today's trading figures, it's easy to see why. The company currently has a market cap of £64m or 7.3 times revenue. For some comparison, Asos and Boohoo.com, which operate in the young fashion market, trade at a price to sales multiples of 2.8 and 9.5 times respectively.
Koovs has struggled to live up to expectations since it hit the market nearly four years ago, and it looks as if the firm is going to struggle to convince investors that's it's worth trusting again anytime soon.
Indeed, at the year ending 31 March 2017 the company reported cash and bank deposits of £8m, enough to keep the lights on for around four months based on the cash outflow of £25.5m recorded for the fiscal year.
To help bolster the balance sheet, management announced a capital raising during August, aiming to raise £18.9m. What's concerning is that in today's results release, an update on the financing revealed that only £8.9m of this total had been raised, implying that the firm is struggling to raise the extra cash.
Large market opportunity
Despite its shaky financial position, there's no doubt that Koovs has an enormous opportunity in front of it.
India is a huge market with a population of 1.3bn, 65% of which are under 35, the company's target market. The country's e-commerce market is exploding as the government pushes digital investment. The e-commerce market is expected to expand by 300% to $60bn by 2020 with the online Western fashion market set to grow fivefold to $3bn. Even after this growth, India's online shopping market will still be relatively small compared to the US where sales are expected to hit $460bn this year.
The bottom line
So, Koovs should benefit from the growth of the market. Unfortunately, it remains to be seen whether or not the business will survive long enough to be able to be able to capture this growth. Management is targeting profitability by 2020, but this depends on financing, and the longer the company remains unprofitable, the more money investors will have to commit to the business.
Overall, it looks as if investors should avoid this falling knife today as shares in Koovs could have much further to fall.
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Rupert Hargreaves does not own shares in any company mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo.com. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.