Is this 7%+ FTSE 250 dividend yield a beautiful bargain or a value trap?
The last time I covered Bonmarche(LSE: BON) it was still suffering from the fallout of a disastrous trading update in January that sent its share price tanking.
Back then the niche clothing retailer advised that total like-for-like sales had sunk 6.9% during the third fiscal quarter. Its market value may have clawed back some of its losses since then but market conditions has become no less challenging.
Indeed, Bonmarche's April update showed a 7.4% decline in comparable revenues during Q4 as store sales continued to fall. Trading conditions are unlikely to improve any time soon, either, as the economic and political cloud hanging over the Britain seems likely to remain for a very long time to come.
Yield jumps to almost 8%
Those fearful over a prolonged crush on the UK retail sector may want to give Bonmarche the cold shoulder, particularly in the wake of more troubling retail sales data.
Just today, the latest BDO high street sales tracker showed like-for-like retail store sales fell 1.7% in June, the fifth drop in a row and -- worryingly for the clothing segment especially as fashion retail sales on a comparable basis dropped 2.3%.
While the BDO noted that non-store (online) like-for-like sales jumped 10.9% last month, this was the smallest increase since December 2015.
Some would argue that Bonmarche's ultra-low forward P/E ratio of 7.7 times reflects its risky earnings outlook and the possibility of forecast downgrades. While this is true, share pickers must be prepared to accept some more share price pain in the current climate.
On the plus side, a predicted 11% earnings rise in the year to March 2019 means that the predicted 7.6p per share dividend, a figure that yields an eye-popping 6.8%, is covered 1.9 times by anticipated profits.
What's more, the 8.5p reward forecast for fiscal 2020 is also covered just shy of the accepted safety benchmark of 2 times, thanks to the expected 12% earnings jump. This anticipated dividend also yields a formidable 7.6%.
Bonmarche also has no net debt on the balance sheet and has a robust £4.3m of net cash on hand to help it meet these near-term forecasts.
A big but...
I'm still not tempted to invest in the FTSE 250 business today, however. Unlike many of the country's niche clothing retailers such as N Brown, the mix of competitive pressures and broader crimping of consumer spending power has caused Bonmarche's group revenues to slip more recently, declining 2.1% in fiscal 2018 to £186m.
In the long term I still believe that the company's decision to cater to the 'mature female' segment should still deliver decent profits growth, as should efforts to beef up its position in the online marketplace (sales generated through cyberspace leapt 34.5% last year).
But given Bonmarche's inability to ride out the current storm battering the high street, and the possibility of a prolonged sales slump, I'm more than happy to splash the cash on other income stocks like those described below.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
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