- Fresh thinking on how to deal with costs
- Increased stocks are a vital hedge
- ‘Trading down’ already evident in sales
If there is one trading update investors should read to gain insight into how managers are currently thinking and planning for the future, it is today’s full year statement from commercial flooring firm James Halstead (JHD).
It probably won’t grab the headlines, but it contains some fascinating nuggets of information.
STATE OF PLAY
The firm says trading for the year to June was ‘robust’ and it expects revenues to be up by around 9% to 10% thanks to growth across all of its main markets.
Its UK manufacturing base has been a major advantage over the last two years ‘as customers look to the advantages of local supply in a way not seen for a generation’.
However, ‘inexorable increases in input costs’ from energy to fuel and international freight rates have clearly impacted margins.
Given the excess manufacturing capacity in the sector the firm has been ‘very cautious’ in raising prices and has prioritised volume sales, with the result that increases in selling prices have lagged cost rises in scale and timing.
COVERING ALL THE BASES
The company says the growing complexities and challenges of rising energy costs, material shortages and general inflation ‘have required fresh solutions and forward planning’.
Having suffered from lost production during the pandemic, the firm had a ‘much lower than optimal’ level of finished goods in June last year.
With better availability of some bulk raw materials from Asia this year and more labour available, it has ramped up production and now holds ‘historically exceptional’ levels of inventory as a hedge against ‘very likely increased costs and shortages’.
While it can’t hold high levels of stocks forever, it has taken a defensive and ‘risk-limiting’ approach in case the ongoing energy crisis starts to affect its ability to produce finished goods.
‘The risks exist that energy shortages in Europe reduce the availability of raw material supply and that industrial action in our supply chain curtails the ability to manufacture.
‘Stock is our hedge and provides us the means to better withstand these potential challenges, though not indefinitely. Against this we have also gauged demand risk since it is possible that in the face of cost increases demand will slow.’
NOT ALL DOOM AND GLOOM
If this all sounds a bit apocalyptic, the good news is demand for commercial flooring has picked up as many businesses have returned to normal - i.e. pre-pandemic - levels of trading.
At the most basic level, the repair and refurbishment of flooring is resilient as the work needs to be done, but the firm also notes the trend towards using vinyl floor covering instead of tiles, timber or carpet in the commercial market has ‘noticeably increased’.
‘Historic experience of previous periods of expenditure constraint or recession have shown vinyl to have benefited from ‘trading down’. Analysis of our sales suggests this is, to a degree, already happening’, says the company.
Finally, it flags the fact its balance sheet is strong and it is in ‘robust shape’ to face whatever conditions the market throws at it.
LEARN MORE ABOUT JAMES HALSTEAD
