Quoted Business speaks to David Sprigg, joint managing director and founder of Stagecoach Theatre Arts, about how the business is performing at the moment.
Stagecoach Theatre Arts is an Aimlisted, market-leading franchise network of part-time performing arts and sports schools for youngsters. The business has yet to see much negative impact from the downturn in economic activity and managing director David Sprigg believes that the sector is particularly resilient. In fact, Stagecoach's network fees in June and July grew 5% year-on-year, cash balances hit a peak of £2.3m in June and it opened several new UK schools in September.
Bucking the trend
"Our underlying business is actually doing better than it was a year ago," says David. "This is our third recession and we've survived all of them since we started the business in 1988. We put it down to the strength of the brand and the fact that parents tend not to cut back on children's education in tougher times, whereas they will cut back on luxuries such as holidays. We are confident of future success despite having to make a small increase in our term fees."
In 2006, when Stagecoach slipped into losses, it carried out restructuring and cost-cutting measures. "We'd geared up for growth that didn't materialise and this was hitting profitability. We managed to rationalise four divisions into a single head office through natural wastage without any compulsory redundancies."
This has led to a significant reduction in the group's total cost base, from £5.95m in 2007 to £5.65m in 2008. The company grew its franchise network fees to £26.5m in 2007.
Dealing with the credit crunch
"We have a great track record with our franchisees and have never had a failure," explains David. "However, the credit crunch is affecting prospective franchisees' ability to raise finance. Until recently, HSBC usually fast-tracked franchisees by, for example, giving credit approval on the same day. But now they look at lending on a case-by-case basis. It's also harder for existing franchisees to find a buyer if they want to move on."
Spend on marketing is a key requirement of every Stagecoach franchisee's contract. "We benefit from this as the first thing that many smaller operations do when times get difficult is to stop marketing, whereas our franchisees are contractually obliged to continue theirs. More than half of our student recruitment now comes through our website. When smaller players fall away we also benefit from such things as a better choice of venues."
David explains that they are seeing many businesses in the sector up for sale – around one a week at the moment. "They tend to be small, independent, sub-£2m turnover franchise operations. We suspect that the owners are putting themselves up for sale before they go bust and we expect to see more of it."
"We have a good cash position and if an acquisition opportunity came along, we would also anticipate support from existing shareholders. We have spoken to a few of these businesses which are up for sale, but so far we haven't seen any that are big or profitable enough."
Current challenges
Like most Aim companies in the current market, Stagecoach faces the issue of illiquidity in its shares. So Smith & Williamson is working with Stagecoach to help improve this by, among other things, increasing its profile with existing and potential shareholders.
"Smith & Williamson provides a high level of service, but also does the basics very well," says David. "The Corporate Finance team is close to us in a way that's rare. They attend some board meetings and this has been very useful."
Stagecoach has also revamped the presentation of its accounts into a better, glossier document. "We've also benefited from having a good independent research note prepared by Hardman & Co., a professional corporate research firm recommended by Smith & Williamson," says David.
Finally, along with all other Aim-listed companies, Stagecoach has just prepared its accounts under International Financial Reporting Standards (IFRS) for the first time. "Under IFRS we have to restate last year's accounts so that, in theory, shareholders can make comparisons with this year. The problem with this is that it's expensive and time-consuming. I also don't see the point of accounting for share options on the profit and loss account. It takes accounting further away from the cash generation side of the business."
But these niggles aside, David remains extremely positive about prospects for the business in a challenging economic climate. "We like good, old fashioned profitability," he says, and on current form, this appears to be what the company is delivering.
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Stagecoach: the facts
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