There was a lot of red ink, literally and figuratively, in the latest trading update from ‘premium British lifestyle’ group Joules (JOUL:AIM) as the firm delivered a downbeat assessment of its performance in December and January.
Investors sought the exit in their droves, sending the shares down 40% to 71p with close to four million shares or 4% of the issued capital traded by 10am compared with an average daily volume of less than 200,000 shares.
SALES BELOW BUDGET
Although sales for the nine weeks from the end of November to the end of January were up 31% on the previous year and 19% up compared with the same period in 2019, they were below management’s expectations.
The firm reeled off a litany of reasons for the sales shortfall, from lower than expected footfall in January due to the Omicron variant to delays in new stock arriving thanks to supply chain issues.
Lack of new stock meant a lower mix of full-price sales, which impacted revenues and the gross margin. In addition, wholesale revenues were lower due to delayed stock with some customers even cancelling their orders.
COSTS SPIRALLING
At the same time, the firm incurred a significant increase in costs not just from higher import duties and freight rates but from their distributors who passed on their own cost increase in the form of labour.
Third-party logistics firms like Wincanton (WIN) and Xpediator (XPD:AIM) operate ‘open book’ contracts with many of their customers, giving them the ability to pass cost increases directly on thereby protecting their own margins.
Joules revealed that costs at its distribution centre were £1.2 million more than management had budgeted for in December and January, and while its own wage pressures had eased after the peak trading period they were still higher than a year ago.
MAJOR OVERHAUL
The firm has already cut head office costs, marketing costs and capital spending, and offloaded older, slow-moving items through third parties in order to clear the decks. It is also implementing price rises for the coming spring/summer collection.
It expects sales for the remainder of the year to recover in line with its original forecast, helped by higher levels of new stock and normalized delivery times. On that basis, pre-tax earnings should be no less than £5 million compared with £6.1 million the year before.
However, with net debt of £21.5 million and total liquidity headroom of £11.5 million, the group doesn’t have a lot of room for manoeuvre if trading doesn't improve. Investors will certainly want to see the audited interim results including the going concern analysis after today’s trading update.
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