Marks Electrical reports growth, but 'leaned too far' into lower-margin products

Marks Electrical Group reported a solid first-half performance on Tuesday, with revenue rising 9.3% to £58.8m, driven by 13% volume growth in major domestic appliances and a more-than-90% increase in consumer electronics volumes, though it was impacted by a shift towards lower-margin non-premium products.

The AIM-traded firm said adjusted EBITDA stood at £2m, though margins were slightly impacted by the shift toward lower-margin consumer electronics, resulting in a gross product margin of 24.6% compared to 24.9% in the first half of the 2024 financial year.

It maintained its focus on working capital management, delivering £1.7m in free cash flow and ending the period with a debt-free balance sheet and £6.7m in net cash.

The company said it would pay an interim dividend of 0.3p per share on 20 December.

Operationally, the group successfully transitioned to the Microsoft Dynamics 365 ERP system, improving operational efficiency, and exited the Euronics buying group, allowing for stronger direct partnerships with manufacturers.

The company’s Trustpilot score remained strong at 4.8 from over 85,000 reviews, with 95% rated four or five stars, showcasing high customer satisfaction despite challenges associated with changing supply relationships and the ERP transition.

Marks Electrical's outlook reflected cautious optimism.

It said that while outbound deliveries were reduced in September and October to facilitate the ERP transition, it anticipates a recovery in revenue growth for the second half.

The shift towards lower average order values, by 9%, helped boost customer acquisition but put pressure on profit margins due to fixed delivery costs.

It said it expected 2025 revenue to reach around £120m, with EBITDA exceeding £4m.

Looking ahead, Marks Electrical said it planned to refocus on premium products to improve margins, even if it moderated revenue growth in the medium term.

Additionally, the company said it would maintain a disciplined cost-control approach to manage anticipated increases in employer national insurance and minimum wage costs, which were expected to add around £0.75m to annual expenses following recent government budget changes.

“The first half has included two of the largest structural changes the business has seen, the departure from Euronics and the implementation of our new ERP system, but despite these, we continued to remain profitable and cash generative and grew revenue by 9.3% to £58.8m,” said chief executive officer Mark Smithson.

“These investments, while involving short-term challenges, have been made to position the business for long-term success.

“They will ensure that Marks Electrical is well placed to benefit when broader market sentiment picks up and will give us even greater vertical integration, visibility and control, enabling us to deliver growth, returns and value for all our stakeholders.”

Smithson said that as the consumer continued to trade-down, the company evolved its business, suggesting it might have leaned “too much into non-premium products”, leading to erosion in our premium average order value.

“The knock-on implications of this on our distribution costs are something that we need to actively address moving forward by pivoting back to our historically premium focussed operating model.

“Whilst this pivot back to premium is likely to have an impact on the speed of our revenue growth, we are focussed on continuing to execute our strategy of driving profitable market share gains, ultimately enabling the group to deliver long-term value creation and become the UK's leading premium electrical retailer.”

At 0936 GMT, shares in Marks Electrical Group were down 13.5% at 50.6p.

Reporting by Josh White for Sharecast.com.