Coats holds guidance on strong sales, targets 18% op margin

After a strong first half, sales growth improved to 11% in the four months to October 31 compared with 8% in the first half of 2024, with accelerating growth in footwear and continued momentum in apparel, partly offset by sustained weakness in performance materials, the company said in a trading update on Wednesday.

The apparel and footwear divisions continued to benefit from a return to normalised levels of customer buying and inventory patterns, with both showing strong year-on-year growth of 14% compared with 14% and 7% in the first half, albeit against a weaker prior year comparator due to the impact of destocking in 2023.

Performance materials sales returned to growth with a 1% increase from a decline of 3% but were still hit by lower order book activity in the personal protection and composites sectors, particularly in the Americas.

Coats said the lower capacity utilisation in the Americas continued to negatively impact the division’s margins.

“Cash generation remained good through the period, and we anticipate a year-end leverage position, including the additional pension funding payment, of 1.6-1.7x, in line with previous guidance,” the company said.

“Our outlook is unchanged with full year performance expected to be in line with market expectations. The group remains well positioned for the medium term, supported by good momentum in our apparel and footwear divisions and strong cash generation.”

Analysts at Berenberg said the trading update should be "well received by investors" and reiterated their 'buy' on the stock with a target price of 135p compared with the current 95p.

They also expected no impact from potential tariffs on China as threatened by US President-elect Donald Trump.

"We understand that Coats’ operational footprint largely encompasses a China-for-China local approach to manufacturing, avoiding any regional pressures from potential tariffs on regional exports. Similarly, Performance Materials’ existing North America sites service local demand, whereas its Mexico sites are not importers to the US," they wrote in a note to clients.

"As such, we expect Coats is well insulated against any global trade impacts from Trump’s presidency."

"The Performance Materials division continues to work through well-flagged pressures, and while we would expect new CEO David Paja to be focused on this division in particular, the overall performance for the group remains impressive notwithstanding these difficulties."

"With the legacy pension overhang having been addressed earlier in the year, and with further evidence of a management team that continues to control the controllables and deliver shareholder returns, we see a lot to like in the context of a 11.7x FY25 P/E valuation."

Reporting by Frank Prenesti for Sharecast.com