Howden Joinery profit edges up but margins decline

Howden Joinery reported an increase in 2018 profit on Thursday but a drop in margins as the company warned of higher costs.

Pre-tax profit rose 2.7% in the year to £238.5m on revenue of £1.51bn, up 7.7% from the previous year. Revenue from Howden Joinery UK depots increased by 7.7% to £1.48bn.

The dividend per share was lifted 4.5% to 11.6p, while net cash slipped to £231.3m from £241.1m after a year of significant investment and shareholder returns. Meanwhile, the gross profit margin fell to 61.7% from 63.3% in 2017.

The company said it expects further operating costs of £15m in respect of closing its operations in the Netherlands and Germany, digital upgrades and additional depreciation. These are in addition to the impact of ongoing growth in the business, inflationary pressures, new depots and any impact of foreign exchange rates.

Chief executive Andrew Livingston said: "We have initiatives underway to improve business performance further, focussed on depot format efficiencies, improving range management and the development of our digital platform. We have put a new depot format into a limited number of depots, designed to enable us to use depot space more efficiently and give us the option to open smaller depots in new locations.

"Consequently we now see the opportunity for around 850 UK depots. Our investment in digital will both reinforce the strong local relationships we have with builders and improve awareness of the Howden offer with consumers.

"We are encouraged by the start we have made to the year and remain confident in our business model for the future."

As far as Brexit is concerned, Howdens said it has taken a number of measures to prepare for its worst case scenario of a no deal situation, with around £15m of additional inventory purchased and key suppliers also making plans to ensure supply. In addition, the group said it is looking closely at the options for its inbound supply routes and pursuing appropriate logistics accreditation, including Authorised Economic Operator status, to reduce potential customs delays.

At 0955 GMT, the shares were down 6.3% to 493.83p.

Russ Mould, investment director at AJ Bell, said: "Kitchens seller Howden Joinery is often cited as a high quality company which consistently generates decent returns on the money it invests in its business.

"This reputation means its share price can be punished hard at the slightest bit of bad news. That’s exactly what’s happened today.

"Margins have slipped, trading since the start of 2019 looks fairly lacklustre, it has guided for a £15m increase in operating costs, and it has incurred a £3.8m pension equalisation charge.

"There is also a sense of nervousness about various elements of its statement which may lead investors to worry as well.

"It is stockpiling inventory worth £15m in case of any Brexit-related supply interruptions.

"A £50m share buyback over the next two years also doesn’t scream major confidence about the future. It has a £231m net cash position and the business is highly cash generative so it could have been more generous. This suggests Howden wants to have a financial cushion in case trading becomes more difficult."