Shares in The Works experienced a significant surge on Monday morning following the announcement that activist investor Kelso has increased its stake in the retailer. The stock jumped as much as 5.8 percent to 38p in early trading, building on a 12 percent gain since the beginning of the year.
Activist Investor Sees Undervalued Opportunity
Kelso, a well-known small cap activist investor, confirmed it had raised its stake in The Works from 6.6 percent to 7 percent. The investor described the arts, crafts, and stationery retailer as "one of the most undervalued companies on the UK stock market" and has written to the board with proposals aimed at closing what it calls a "clear valuation gap."
The Works, which operates more than 500 stores across the United Kingdom, has been trading with a market capitalization of just £20 million despite generating annual revenues exceeding £250 million. This valuation disconnect has attracted activist attention as the company shows signs of operational improvement.
Recent Performance Improvements
Despite a challenging period for the retailer, The Works has recently strengthened its financial position. The company reduced its net debt from £8.5 million to £5.3 million and achieved a 4 percent increase in like-for-like sales. Pre-tax losses were also trimmed from £6.9 million to £5.6 million, indicating progress toward profitability.
Kelso highlighted that The Works trades at an enterprise value to pre-tax earnings multiple of just 1.65x and a revenue multiple of 0.05x, both below industry peers despite these operational improvements. The investor attributes this performance to "strong operational management" within the company.
Turbulent History for High Street Staple
The Works has endured a difficult journey since its 2018 initial public offering, with shares declining approximately 80 percent from their peak. The stock reached an all-time low of 18p during the pandemic lockdowns of 2020, which forced widespread store closures.
Further challenges emerged in 2022 when the retailer fell victim to a costly cyber-attack that disabled payment systems and necessitated additional store closures nationwide. These setbacks contributed to the company's prolonged valuation struggles despite its extensive store network and brand recognition.
Kelso's Investment Strategy
Founded in 2023 by City veterans, Kelso targets undervalued UK small and mid-cap stocks through a focused investment approach. Approximately 20 percent of the company is controlled by its board, which maintains a concentrated portfolio of selected opportunities.
This isn't Kelso's first activist engagement with retail companies. The firm previously built a stake in e-commerce retailer THG in 2023, arguing it was undervalued. That investment led to a notable confrontation when THG co-founder Matt Moulding acquired a stake in Kelso in what market observers described as a "hunted turns hunter" strategy.
Kelso's current declared holdings include CVS Group, Saga, NCC Group, THG, Angling Direct, and Selkirk. The investor's increased position in The Works represents its latest effort to identify and capitalize on perceived market inefficiencies in the UK retail sector.
