The Coattail Thesis For Best And Less (ASX: BST)

I didn’t expect an email asking about discount retailer Best And Less (ASX: BST), but the question was a good one. Are Best And Less shares now attractive, simply because Brett Blundy is a buyer?

Well, it’s a good question. Generally speaking coat tail investing is a reasonable approach (though by definition, you may end up following someone into a mistake.)

For anyone wondering, Coattail investing is an investment strategy riding on the coattails of successful investors such as Brett Blundy, who is well known for his involvement many retail success stories, the most impressive (in my opinion) being Lovisa.

How Did Best And Less Get Here?

Its no secret that low cost retailers like Best and Less, or The Reject Shop are generally sensitive to the economic cycle. While some will incorrectly claim that people who shop elsewhere will flock to shops like Best And Less, the reality is that the people who already shop at Best And Less will be the first to feel the pinch when the economic cycle tightens.

As a result Best And Less recently downgraded its pro forma net profit after tax guidance for H2 FY 2023 to $10m to $12m from the prior range of $18m to $20m.

The largest shareholder has been wanting to sell, and the company has just undergone a CEO transition.

Overall, you can see why the share price has fallen to around $1.89, giving Best And Less a market capitalisation of around $240m. And indeed, that is the price at which Brett Blundy and Ray Itaoui are trying to buy Best and Less shares, in an off-market takeover offer.

Is $1.89 A Good Price For Best And Less Shares?

Using the low end of guidance for H2 FY 2023 (and annualising the seasonally weaker second half), you would be paying around 12 times earnings for the company, at $1.89.

Now, given Best And Less’s past performance, that wouldn’t necessarily be attractive. However, with the takeover offer, you have a range of outcomes, and they probably skew more positive from here.

According to the AFR Brett Blundy and Ray Itaoui will be buying shares from Best & Less chairman Jason Murray and Private Equity Investors Allegro (as well as any other shareholders who would like to participate).

Unless these sellers receive a higher offer, Blundy and Itaoui will get 55%+ of shares, while Best And Less stays listed.

I think that it is very possible that results will remain weak for Best and Less, at least in the short term. I would definitely be prepared for the possibility that this is the “pain trade”, since the outlook for retailers doesn’t look great with rising rates. One could see the share price drop below $1.89, after the takeover lapses.

Having said that, when it comes to coattails, I like Brett Blundy’s. While not all businesses he invests in do well, I definitely believe he and business partner Ray Itaoui have a plan to improve Best And Less.

Importantly, the takeover offer notes that:

“It is proposed that Ray Itaoui will be appointed as Executive Chair for a transitional period until Erica Berchtold joins the Company as Chief Executive Officer in September 2023. Upon Erica joining, it is intended that Stephen Heath will become Chair of the BLG Board and Ray Itaoui will revert to a Non Executive Director role.”

Given that (when combined) they will hold many more shares than the other directors and control the company I think there is a good chance that in the long term Brett Blundy and Ray Itaoui are savvy buyers at the current price.

Therefore, while I personally don’t invest in retailers much, and I do think that Best And Less shareholders might be in for a pain trade over the next few years (that is, the shares may go lower), I think in the long term $1.89 will prove a reasonable price, and I think it would be fairly reasonable to buy shares in a retailer at the same price as Brett Blundy, with the intention of selling when he sells!

Basically, the choice here is whether you think that Allegro and Murray are making the smarter trade here, or if Blundy and Itaoui are. My bet is it’s the letter gentlemen, given their track record for running and investing in retailers.

However, one risk is that Best And Less shares continue to trade lower, and ultimately the company is taken over completely by Blundy and Itaoui at an even lower price. In that scenario, listed minority shareholders might be forced to sell at an even lower price, and then ultimately Blundy and Itaoui might end up re-floating it at a higher price later.

While I have no plans to invest in Best and Less myself, I think that in the long term $1.89 will prove to be a good price for Best and Less shares. That said, due to the risk above, I wouldn’t want to have more than a small speculative “coat tail” investment in the company.

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Disclosure: the author of this article does not own shares in BST and will not trade in BST shares for at least 2 days following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Equity Story Pty Ltd (ABN 94 127 714 998) (AFSL 343937).

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