Investment in growing the business means that fishing tackle retailer Angling Direct (LON:ANG) reported a fall in interim pre-tax profit. That was not a surprise and the benefits of the growth in the retail estate will take time to show through.

The first half is the profitable period of the business, but much higher administrative costs meant that interim pre-tax profit fell from £480,000 to £323,000, while revenues were one-fifth higher at £26.5m. Excluding exceptional costs, last year there was a full year loss of £255,000.

The company prefers to point to EBITDA, which is more flattering, with an improvement from £1.08m to £1.25m in the six months to July 2019. The depreciation charge rose from £465,000 to £775,000 and is the predominant reason for the lower pre-tax profit.

Trading

Angling Direct appears to be bucking the retail trend. Like-for-like sales increased by 14.9% as more people visited the stores and they spent a higher amount on average.

In the first half, two stores were acquired, and two new ones opened. Two more stores have opened and by the end of January the number of stores is expected to be 34.

UK online sales rose 17% to £9.2m and the less mature European sales were 29% ahead at £2.7m. Individual German, French and Dutch websites are growing even faster.

The average basket size online is £79.92, which is more than double the in-store level.

Sales via eBay fell from £800,000 to £500,000 as the focus is on gaining business via the company’s own websites.

Cash

One thing that was particularly positive was the improved cash generation from operating activities. That rose from £628,000 to £1.71m, although more than double that amount was spent on investment in growing the number of stores. This cash generation was achieved even though inventories rose substantially. There will be a working capital outflow in the second half, though.

Last year, a placing raised £20m at 92.5p a share. Net cash is nearly £13m, excluding leases. The figure will decrease as more stores are opened, although there will continue to be a significant cash pile in the years to come.

Market

Angling Direct is involved in a fragmented market, but it is a large one. The strategy is to get to annual revenues of £100m in the medium-term.

Full year revenues of £44m are forecast and its broker Cenkos believes that this equates to an 8% share of the UK market.

Total spend by European anglers, including sea anglers, is thought to be €25bn. A better indication of the potential is the online market which is not as mature as the UK and is estimated to be worth £600m a year.

Prospects

Since the end of the half year, like-for-like store growth has been 11.8% and there are initial contributions from stores in Milton Keynes and Leeds.

Angling Direct is set to lose money again this year, before moving into profit in 2020-2021. That would still value the company at around 100 times earnings.

The share price of 60p is less than two-thirds of the placing price one year ago. Significant progress has been made, but profitability will lag the investment.