Ferguson
There was little to fault in the third-quarter trading update from Ferguson. The world’s largest distributor of plumbing and heating products delivered group organic revenue growth of a shade over $5 billion, up 7.1 per cent in the three months to the end of April 30, leaving a trading profit of $356 million, 17.1 per cent higher.
It was the fifth consecutive quarter that Ferguson has delivered organic growth above 7 per cent, a measure that strips out currency fluctuations and mergers and acquisitions. The figures were ahead of consensus forecasts, too, prompting analysts to raise expectations and the shares to rise 1.8 per cent to £60.00, close to last week’s record high.
Ferguson was called Wolseley, its trading name in Britain, but changed its name last July to reflect its larger American business. It remains listed in London and is a constituent of the FTSE 100 with a market capitalisation of £14 billion.
Revenue growth in the United States outpaced that of the group, jumping by 10.6 per cent, of which 0.8 per cent was from acquisitions and 3 per cent price inflation. It helped to generate a trading profit of $334 million, up almost 21 per cent year-on-year. Decent residential demand underpinned growth in all US regions. Commercial markets, which range from offices to hotels, were solid; industrial markets benefited from a few larger projects. All business units generated organic growth and gained market share.
If there is a threat on the horizon, at least it’s a familiar one — or at least one familiar to so many sectors, from retail to postal services to health — in the shape of Amazon. Ferguson is confident that it is relatively insulated from the online giant’s direct-selling competition because most of its business is based on supporting customers over long production cycles.
The British business, though, is less dynamic. Organic revenue edged only 0.7 per cent higher (albeit an improvement on the decline in the second quarter) and trading profit slumped by 29.3 per cent to $23 million. The company has been exiting the low-margin wholesale business and has closed about 100 branches, reducing the total to about 590.
Why such a contrast on both sides of the Atlantic? Ferguson blames a weaker British economy compared with that of America, the larger size of homes in the US and the amount spent on them. Its British business is more exposed, too, to the weaker heating market, whereas in America it has a larger plumbing business. Despite the problems in the UK, Ferguson has no plans to close further branches or to quit the business altogether.
Ferguson’s third and smallest business, comprising Canada and central Europe, was positive, with revenue, margins and profit all higher.
The overall positive update left a sturdy balance sheet. Net debt came in at $260 million at the end of the period, after accounting for the sale of Stark Group, its Nordic building materials business, for about $1.2 billion to an affiliate of Lone Star, an American private equity firm. The proceeds are being returned to shareholders through a special dividend of $4 per share ($1 billion) and will be paid at the end of the month. Meanwhile, a $650 million share buyback programme, announced last October, has been completed.
Momentum has continued into Ferguson’s fourth quarter, with organic revenue growth ticking along at the rate of the previous quarter, leaving the group “well positioned for a successful outcome for the year”. The shares are near record levels and trade on a 2019 earnings multiple of about 16.5 times.
Advice Hold
Why Dominant core US business and has been restructuring the British business
Footasylum
Far be it for The Times to cast aspersions about its audience, but it is unlikely that many readers of Tempus have been inside a Footasylum shop. It now appears they should avoid the shares, too.
The shoe retailer has attracted a strong following among the 16 to
25-year-old market. Its stores are dark, play pumping music and exist on knowing what is “cool”. Clarks, it is not.
The company listed on Aim last year and was valued at £171.3 million and 164p per share. It has 67 stores and a strong online presence. It was founded in 2006 by David Makin and John Wardle, the founders of JD Sports.
At the time of the group’s float, investors had been positive about the distinctive “voice” that the brand holds among young people and its “first move franchise” deals with the likes of Adidas and Nike, where manufacturers agree that a retailer can sell their product exclusively.
Yesterday, however, investors cut the company’s value in half, with the shares closing down 52 per cent, or 87½p, at 80p. That is because earnings before interest, tax, and amortisation are now expected to grow by less than 10 per cent for 2019, compared with market expectations of 15 per cent. You cannot deliver a downgrade when you are on 40 times your price-to-earnings ratio. That will annoy shareholders. Pre-tax profits also dropped, by 76 per cent to £1.9 million, in its maiden results since listing on sales of £194 million.
Footasylum said that trading since the start of the financial year had been affected by the “widely documented weak consumer sentiment on the high street”, but it is the lower gross margins trends that are causing concern. It has been affected by the discounting of footwear and fewer first move franchises. That’s because brands have culled the list of retailers they give exclusive launches to and have been going straight to the consumer. That trend is likely to continue, with bigger names such as JD more likely to end up being included. Footasylum looks likely to be hurt in the process.
Advice Sell
Why Margin trends look worrying and product allocation for the likes of Nike and Adidas only likely to fall
