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This small-cap stock just crashed. Here’s what I’d do now

Graph Falling Down in Front Of United Kingdom Flag

Small-cap stock Joules (LSE: JOUL) fell by over 20% in early trading on Tuesday. The drop was triggered when the fashion retailer warned that profits would be lower than expected this year. Joules’ share price has now fallen by 50% from this summer’s peak, although it’s still up by 5% over the last year.

I’ve been digging into today’s update and crunching the numbers. I reckon this successful retail stock might be starting to look cheap at current levels. Should I add Joules shares to my Stocks and Shares ISA?

Sales rise by 35%

Like most of the UK retail market, Joules has suffered from supply chain problems over the last six months. Despite this, sales rose by 35% to £128m during the six months to 28 November.

The gains were driven by rising store sales as well as online growth. According to the company, in-store sales were only 3% lower than during the same period before the pandemic. This gives me confidence that Joules’ shop portfolio is still performing well, despite the general trend towards shopping online.

The only real disappointment is that supply chain problems have caused delays in online deliveries. Performance during November — including Black Friday — was below expectations.

Will Joules’ profits rise or fall this year?

A profit warning is never good news. But the picture at Joules seems to be better than I thought it might be.

According to the company, adjusted pre-tax profit for the current financial year is now expected to be between £9m and £12m.

This is a wide range, which suggests there’s still a lot of uncertainty. But even at the bottom end, £9m would still be 50% ahead of last year’s pre-tax profit of £6.1m.

Unfortunately, City analysts had even higher expectations for this year. Consensus forecasts before today were targeting a pre-tax profit of £15m this year. That seems unlikely now.

Should I buy this small-cap stock today?

Since its flotation in 2016, Joules’ annual sales have risen from £131m to around £200m. I’ve been impressed by the company’s performance and its ability to keep growing. The company’s country lifestyle vibe seems to resonate well with shoppers. Profit margins look quite respectable to me.

Another thing I like about this business is that founder Tom Joule still owns nearly 22% of the stock and sits on the board. I reckon this should ensure the company is run with shareholders in mind.

The main risk I can see after today’s profit warning is that the group’s recovery will take longer than expected. The combined impact of the pandemic and supply chain issues is hard to predict.

I think the worst is probably over, but I can’t be sure of this. In my experience, the first profit warning is often the start of a company’s problems, not the end of them.

I estimate that after today’s slump, Joules shares could be trading on around 17 times 2022 forecast earnings. At this level, I think the stock could be quite reasonably priced, if management can get growth back on track in 2022/23.

I’m not going to buy Joules today. But if the shares fall much lower, I may consider adding the stock to my portfolio.

The post This small-cap stock just crashed. Here’s what I’d do now appeared first on The Motley Fool UK.

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Roland Head 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.