This nightmare growth stock fell 90% in 2018 and there could be worse to come

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In a year that saw the majority of retail stocks kicked about, branded footwear seller Footasylum(LSE: FOOT) stands out as one of the worst performing stocks of them all. 

Priced at 255p a pop back at the beginning of 2018, the shares fell 90% to end the year a little under 26p following a couple of profit warnings. 

Based on today’s trading update for the 18 weeks to 29 December, it looks like 2019 could be just as tough for the Rochdale-based firm and its investors. 

Revenue up, but…

At first sight, it doesn’t seem so bad with the company growing revenue “across all channels and all major product categories“. Total revenue rose 14% to a little over £102m. Online sales jumped 28% to £36m and have now contributed a third of total revenue for the year-to-date. Revenue from retail stores was also up 5% to £63.7m.

So, why were the shares down 13% in early trading? Much of this is likely due to the news that gross margin for the full year will now be “lower than previously anticipated” as a result of Footasylum needing to offer more promotions to entice shoppers to buy from the company rather than from rival retailers. This pretty much negates all of the previous positive talk about rising revenues. 

Another reason is the (unsurprisingly) downbeat outlook. According to the company, trading conditions experienced over the first half of its financial year “have continued throughout the Christmas trading period“, leading it to state that its short-term future is “undeniably challenging“. As a result of its desire to focus on cash and working capital,  a cost reduction plan was also announced which may generate some exceptional costs in the current financial year. This means that adjusted earnings will now be “towards the lower end” of analyst forecasts.

I’ll admit to becoming rather interested in Footasylum when it began falling early last year. However, with consumer confidence now likely to remain weak for some time, especially with Brexit just around the corner (at least officially), I’ll continue to steer well clear. At a time when other retailers are closing stores in order to preserve cash, its decision to open five new sites (and upsize three others) in time for Christmas looks increasingly misjudged. There could be further pain ahead for those still holding.

Price jump

Also reporting today was lifestyle clothing and accessories business Joules Group(LSE: JOUL)

Although its share price didn’t suffer to quite the same extent as Footasylum’s, many investors still chose to dispose of their holdings in the small-cap over 2018. From a peak of 387p back in June, the shares had fallen 37% in value before this morning’s trading update was released to the market.

The reaction to the latter, however, couldn’t be more different with the stock jumping 5% in early trading. 

Retail sales increased 11.7% over the seven weeks to 6 January with growth seen “across all the brand’s product categories” and almost half of these sales achieved online. Crucially, management continues to believe that pre-tax profit for the full year will be in line with expectations. With many retail stocks issuing warnings, this is pretty encouraging stuff.

On 18 times earnings before this morning, Joules isn’t cheap to buy, but it’s surely a more palatable option than Footasylum. Interim numbers for the six months to 25 November will be released in just over two weeks. 

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Joules Group. 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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