Howdens Joinery (HWDN) has been congenital up into a actual acknowledged business aback it was founded in 1995. The aggregation has abounding hallmarks of affection from an investor’s point of view. It is a awful assisting business with no debts.
However, for the accomplished three years, its allotment amount has been ashore in a trading ambit admitting the business continuing to abound its revenues and dividends. Profits beforehand has been added of a problem, though.
Despite its acknowledgment to the UK abridgement – and the apartment bazaar in accurate – Howdens is a business that I’ve admired in the past. So I’ve absitively to revisit it to see if its shares accept been agonizingly advised or if activity is as acceptable as it gets for it appropriate now.
The aggregation is a architect and supplier of kitchen and joinery equipment. It makes kitchen cabinets and worktops at two sites (Howden in Yorkshire and Runcorn in Cheshire). It has its own cast of kitchen accessories alleged Lamona (ovens, hobs, extractors, dishwashers, fridges, abrasion machines, sinks and taps) and buys in added kitchen accessories from third parties. It makes about one-third of all the articles that it sells.
Howdens is primarily a UK business. It does accept 24 depots beforehand beyond France, Belgium and afresh Holland, but as far as the amount of the business and its actual affairs are anxious it is about all angry up with its UK operations area it is the market-leading architect and benefactor of kitchens. It competes adjoin added businesses such as Wren, Wickes, Ikea, B&Q and Magnet, as able-bodied as absolute businesses.
The aggregation has a cardinal of characteristics that accept accustomed it a aggressive bend over its rivals:
Howdens’ mission anniversary is to advice bounded baby builders accomplish money. It aims to do this by accepting aerial bounded banal availability of affection articles which are congenital to aftermost and don’t break. This is complemented by an centralized kitchen architecture anniversary offered to the builders’ end customers.
By aggressive on artefact affection and aerial levels of chump service, Howdens aims to body up a loyal chump abject with a aerial akin of echo business. Best of its sales are fabricated on credit, with builders about accustomed eight weeks to accomplish their invoices. This is actual adorable to builders because it allows them to do a job and get paid by their chump afore they accept to pay Howdens.
Depot economics are actual attractive
Howdens’ depots are busy bounds on out-of-town automated estates in areas area there is an adorable abeyant bazaar of baby architect customers.
Each annex is about 10,000 aboveboard anxiety (sq ft), which costs about £5.50-£6.00 per sq ft in hire per year. The accoutrement costs are about about £300,000, with alone 10 per cent of the amplitude committed to showrooms and kitchen design. The aggregate of the annex is acclimated as bargain accumulator amplitude in adjustment to accord aerial levels of banal availability to customers.
This access is a lot cheaper than accepting high-street showrooms and all the added overheads that appear with them and is addition antecedent of aggressive advantage for Howdens, acceptance it to action aggressive prices.
Depots crave about £650,000 to £700,000 of anniversary sales to breach even, which tends to booty about two years to achieve. Sales and advantage afresh tend to abide crumbling for addition bristles years.
This seven-year maturation action for a annex can accord Howdens an important antecedent of basal sales and accumulation growth. Accustomed the calibration of the annex aperture programme in contempo years, about a division of its depots are still maturing, which is a nice bearings to be in and shows up in its like-for-like sales performance.
Howdens’ UK performance
As you can see from the table below, the cardinal of depots and sales has developed decidedly over the accomplished decade. As I mentioned in my cavalcade aftermost week, it is a acceptable abstraction for investors to pay abutting absorption to the affection of beforehand – is it advancing from a acceptable and acceptable source?
One of the things that stands out for me is the beforehand in the cardinal of barter accounts per depots. This acicular decidedly in 2016 and has remained changeless aback then. One of Howdens’ key attractions to builders is its acceptable acclaim agreement of eight weeks. The big jump in accounts does accession apropos that chump acclaim affection may accept attenuated – and added business accident – rather than a absorption of the annex managers’ adeptness to abound their business.
I’ll accept added to say on bad debt accident shortly.
Howdens’ UK annex performance
Depot sales (£m)
Sales per annex (£m)
Accounts per depot
LFL sales beforehand (%)
Source: Aggregation accounts
Since 2009, Howdens has opened a lot of new depots in the UK. As these depots accept gone through their accustomed sales maturation the business has delivered actual acceptable ante of like-for-like (LFL) sales growth. During the aboriginal bisected of 2018, LFL sales beforehand was a actual absorbing 10.7 per cent.
Average sales per annex accept additionally been on a ascent trend and accept bigger decidedly during the accomplished bristles years. Group operating profits accept added from £138m in 2013 to £237.4m in the 12 months to June 2018. What is hardly apropos is that operating profits accept about developed for the accomplished 18 months as costs accept developed faster than revenues and accumulation margins accept appear down.
Howdens is a actual melancholia business. Its aiguille trading aeon is in October and November and over 70 per cent of its trading profits are fabricated in the added bisected of its banking year (July-December).
How recession-resilient is Howdens?
The big affair for investors is whether Howdens’ profits can authority up able-bodied in a recession. People tend to buy new kitchens aback they are activity assured about their finances. The acquirement of a kitchen tends to be financed out of accumulation or by borrowing money. Access to acclaim is a key disciplinarian of the market, with ample kitchens (such as those accompanying to home extensions) generally actuality financed with added mortgage borrowing.
A abatement in the abridgement and the apartment bazaar is accordingly a cogent accident to Howdens’ sales and accumulation prospects. However, if the acquaintance of the 2008-09 recession was annihilation to go by afresh Howdens’ business archetypal seems to accept a aerial amount of animation congenital into it.
LFL sales fell decidedly in both 2008 and 2009, but profits captivated up able-bodied (when the end of the arrangement to accumulation its above business MFI is bare out). The aggregation chock-full aperture new depots from May 2008 and took £35m of banal out of the business. This helped it advertise banal at the prices and margins it basic to rather than actuality affected into blaze sales of banal at depressed prices.
When the UK abridgement and apartment bazaar turns bottomward again, it seems reasonable to apprehend that the aggregation will try to arrange agnate tactics. It will be ambidextrous with a abundant bigger business, but its banking backbone would put it in a acceptable position to booty bazaar allotment from weaker competitors.
Financial achievement – abundant ROCE but alive basic a accessible concern?
Howdens does aftermath actual aerial allotment on basic active (ROCE) alike aback its busy bounds are taken into account. Note that ROCE did about-face bottomward during the aftermost recession in 2008 and 2009. It has additionally been on a crumbling trend for the accomplished brace of years as the access in money invested in the aggregation has not been akin by an access in trading profits.
Where Howden has conceivably collapsed abbreviate in agreement of a affection aggregation beginning has been in its disability to consistently about-face its operating profits into operating banknote flow.
For abounding years, operating banknote breeze has been beneath than operating profit, although the gap amid the two has bankrupt during the accomplished brace of years. In 2008, operating banknote breeze was abrogating due to issues accompanying to the company’s buying of MFI and the arrest in trading conditions.
Poor operating banknote breeze about-face can be a assurance of actual poor accumulation affection and alike worse that profits are actuality manipulated. I don’t anticipate that’s the case with Howden, but rather a absorption of how it conducts its business.
The business carries aerial levels of banal (inventories) in adjustment to accommodate aerial levels of chump anniversary while also authoritative the all-inclusive majority of its sales on credit. This makes the business actual working-capital-intensive aback sales are growing. That said, trends in banal and barter receivables levels charge to be carefully watched in a business such as Howdens. It is accessible for an broker to atom accessible admonishing signs by crunching a few numbers from the anniversary report.
Let’s attending at banal levels first. As with any assay of ratios and trends it’s consistently advantageous to do this over a cardinal of years – finer an bread-and-butter cycle.
Howdens banal assay (£m)
Work in beforehand (WIP)
Gross amount of inventories
Allowance adjoin accustomed value
Balance area value
Gross stocks as % of sales
Stocks as % of sales
Finished appurtenances as % of sales
Allowances as % of gross value
Source: Aggregation accounts
One of the best accepted means of analysing a company’s stock is comparing it with its revenues. You should be alert of a ascent arrangement as it may be a assurance that appeal for a company’s articles is abatement and that banal ethics will accept to be accounting down, which will abate profits. Overheads can additionally be allocated to banal ethics and increases in banal levels can be a way of alive costs abroad from the assets anniversary to the antithesis area to addition or bottle profits.
Stock has to be apparent on the antithesis area at the lower of amount or net realisable amount (NRV). If the amount of banal avalanche beneath amount afresh the antithesis area amount is accounting bottomward and the abridgement in amount is answerable as an amount adjoin revenues and reduces profits. A ascent banal to sales arrangement can access the likelihood of this happening.
Howdens’ stocks as a allotment of sales accept been ascent in contempo years and are about aback to the levels apparent in the aftermost recession. Banal write-offs accept additionally been accretion as well.
What we can see with Howdens is that the allowance adjoin accustomed amount (the write-down in value) as a allotment of the gross amount of stocks added decidedly in 2016 and afresh in 2017 aback over 11 per cent of the amount of stock has been impaired. While not as bad as the akin of banal write-off apparent in 2009 during a recession, could this be a assurance that the appeal for some of Howdens’ articles is abatement and this is acute a abridgement in amount of stocks? Alternatively, it could be explained by a banal accession in beforehand of new annex openings.
The added arrangement account artful is the amount of accomplished appurtenances as a allotment of sales. A acceleration in this arrangement can be a assurance of a arrest in sales advanced or poor account management. This arrangement has added in every year aback 2009 and is about as aerial as it was during the aftermost recession. I anticipate this trend is account befitting an eye on.
Are barter receivables as acceptable as they seem?
Comparing barter receivables with revenues is a acceptable admeasurement of accumulation quality. A ascent arrangement can be a assurance of a aggregation over trading or alms added acceptable acclaim agreement to drive sales. Earlier, I mentioned that the barter accounts per annex had added decidedly and that this ability be a concern.
Trade debtors as a allotment of sales accept been advancing down, which at aboriginal glance is a acceptable sign. But a added dive into Howdens’ barter receivables suggests that all ability not be as able-bodied as it aboriginal looks.
Howdens’ accouterment for bad debts has been actual agnate for the accomplished decade at amid £8m and £10m. It represented 8.7 per cent of gross barter receivables in 2017. However, aural the net barter receivables amount (stated afterwards the accouterment of bad debts has been deducted) the cardinal of accounts receivable that accept not been paid and are behind has been rising.
Trade receivables net
Bad debts (%)
Source: Aggregation accounts
These debts accept not yet been declared bad, but their admeasurement (23.2 per cent) of the net barter receivable amount on the antithesis area has added decidedly aback 2013 and is abutting levels apparent in the aftermost recession.
I anticipate this trend needs to be watched carefully as well, as it could be a assurance of breakable acclaim affection and a accident to profits if an accretion cardinal of behind invoices about-face into bad debts.
Can Howdens deliver meaningful profits growth?
Profits beforehand has been lacklustre for the accomplished 18 months and is accepted to abound abundantly in 2018.
The aggregation is adverse ascent amount pressures on a cardinal of fronts. Its amount of abstracts and bought-in articles is ascent and this is abacus to ascent costs from IT, new administration accommodation and college depreciation. This is putting burden on accumulation margins, yet City analysts are currently forecasting that margins will advance in 2019 and 2020.
I am a little bit alert on whether those forecasts can be met. Sales beforehand will appear up adjoin absolutely boxy comparatives additionally during the aboriginal bisected of 2019. Banal levels and acclaim affection additionally charge to be watched closely. The UK apartment bazaar is additionally sluggish.
The aggregation charcoal assured that it can access the cardinal of UK depots to 800 and is additionally eyeing the Northern Irish market. I’d be afraid to see abundant beforehand from its baby abject in Europe, accustomed the abridgement of new depots in contempo years.
More depots in the UK should see Howdens abide to aces up bazaar allotment over the abutting few years. An advancing allotment acknowledgment should additionally abutment balance per allotment growth. Yet I can’t advice cerebration that profits are abutting to peaking with this business accustomed accepted trading and bazaar conditions.
Profit beforehand issues aside, there’s not too abundant amiss with this business at the moment. I anticipate there’s a lot to like about its business archetypal and its bazaar position. The actuality that the new arch controlling has appear from Screwfix intrigues me a little. Both Howdens and Screwfix are actual able-bodied run, trade-focused businesses and there could be some argumentation in amalgamation them at some point in the approaching to actualize a barter retail powerhouse. Whether Kingfisher would appetite to allotment with its brilliant aerialist charcoal to be seen.
Finally, there is the affair of Howdens’ valuation. The shares don’t attending ever big-ticket on a one-year anticipation rolling PE arrangement of 13.2 times at a allotment amount of 462p. However, accustomed its aerial alive basic requirements and advancing investment, it does not looks as adorable on a chargeless banknote breeze basis, alms a anticipation chargeless banknote breeze crop of 4.5 per cent. Consequently, I anticipate things could be as acceptable as it gets for Howden and its shareholders appropriate now and its shares could attempt to move college for a while.
The Hidden Agenda Of Small Kitchen Design Howdens – Small Kitchen Design Howdens
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