Small Cap Focus: Stagecoach Theatre Arts' profitable role

By Andrew Hore

Date: Thursday 14 Aug 2008

Children’s theatre and dance schools franchise owner Stagecoach Theatre Arts nearly doubled its profits last year and demand from children and parents for its theatre schools remains strong.

Stagecoach was founded by joint managing director Stephanie Manuel 20 years ago and joined Aim in 2001. It had grown strongly but like many growth companies it lost its focus when it tried to expand too quickly. The group fell into loss but it is back to making profits again.

International expansion didn’t go as planned and management took its eye off the ball in the UK. The UK performance improved significantly last year as cost savings came through, and the US and German business are heading towards breakeven.

Stagecoach is a straightforward franchise business. Anyone chosen as a franchisee has to pay an initial fee of £16,500 + VAT. In all, start-up costs are estimated at £25,000. The continuing franchise fee is 12.5% of revenues and on top of that is a fee of 2.5% of revenues that goes towards advertising and marketing.

Stagecoach has 621 part-time schools in the UK as well as 698 Early Stages classes for younger children. This business is still growing and there is scope for more franchisees. Including the international businesses Stagecoach has around 40,600 students.

An agency business helps the students get parts in TV programmes, theatre and films including Dr Who and The Golden Compass. The agency loses money but this effectively a marketing cost for the group.

According to Stagecoach, a franchisee can make a profit of £17,000 on turnover of £48,000 for a three hour weekly school plus one Early Stages class. Franchisees run an average of 2.3 schools each.

Group pre-tax profits increased from £375,000 to £707,000 in the year to May 2008. This was around 30% higher than forecast although management had already said in June that it would beat the forecast - but not said exactly how well it had done.

Group revenues were flat at £6.33m but the underlying franchise fees grew by £300,000. The revenue of the whole network of franchises increased from £26.5m to £28.5m. Net cash is £916,000 and a dividend of 2p a share was announced.

Restructuring of the business helped management to cut costs. The head office was merged onto one site and the number of direct employees of the company has fallen. The US and German businesses are managed from the UK.

An improved management information system has also helped keep down costs and enables Stagecoach to know whenever a franchisee signs up a new student.

The past international experience means that the management is better placed to know how to expand overseas. It already has licences or direct franchises in Australia, Ireland, Spain and Greece among others. Stagecoach will be more cautious and won’t be setting up its own cost base in new countries.

Stagecoach has developed other franchise operations but they remain small compared with the core Stagecoach business. SportsCoach is a sporting version of the Stagecoach franchise which appeals to children not interested in the theatre.

Longer-term, management has high hopes for its new retail website, www.stagecoachshop.co.uk. Stagecoach doesn’t take any of the stock onto its own books so this reduces the financial worries about the venture. The business has a ready-made audience of children and their families. The website sells clothing, toys and plays. It hasn’t made a significant contribution yet.

Further growth in profits will come from expanding the UK business and improving the performance of the international operations. This will come from adding new countries and stemming the losses in the US and Germany. The US lost £78,000 last year but could breakeven this year. Germany lost £105,000 but it may take longer to bring that business into profit.

Hardman & Co has maintained its 2008-09 profit forecast at £720,000, rising to £900,000 next year. This should leave scope for an upgrade of the current year forecast at the time of the interims, particularly if the losses in Germany and the US are reduced. At 68.5p, the shares are trading on 13 times prospective 2008-09 earnings and yield around 3%.

It is right to be cautious about the UK because of the current economic conditions but historically pupil numbers have held up well in tougher times. Many of the franchisees have waiting lists any way.

The long-term outlook for Stagecoach is positive.

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