Trading statement: A very successful period
In the first four months, sales grew by 66%, significantly ahead of our forecast assumption for the year of 37%. European growth was notably strong at 137%, while UK growth remains extremely healthy at 44%. As a result European sales now represent 34% of total sales compared with 24% for the same period last year. That is ahead of our forecast assumption of 33% for the entire year. With European penetration growing even faster after the referendum, it is likely that the rest of the year will raise the European mix above our forecast. This is important in view of the strategic objective to build European share; as we noted in our initiation, the estimated addressable market is £4.3bn compared with £750m in the UK alone.
This trading statement covers the period 1 March to 30 June, and therefore includes only a few days of the post-Brexit vote period. As the company announced in early July, in the first full week of that period (ending 3 July) European sales growth spiked to 191%. Clearly the first four months is substantially before that boost, which would only make a few percentage points difference to the 137%. What is clear therefore is that the striking success of European penetration is not an effect of the Brexit vote, even though it has strengthened further since.
Own brand sales growth has been encouraging, as a result of range extensions, good marketing support, and a strong reception for the company’s products.
We understand that margins and overheads as a whole have not been out of line with forecasts, with further progress on e-commerce investment, marketing actions and staff capabilities.
There has been significant stock investment recently, in line with the increased levels that we forecast, and with the company’s strategy of investing in stock to improve service levels, in particular next-day delivery. As a related point, the company continues to progress on increasing the proportion of stock, currently 85%, that is currently in the warehouse or where fulfilment is integrated with suppliers.
Trading following Brexit vote positive but fluid
We understand that G4M’s increased competitiveness in European markets since the Brexit vote is continuing, allowing the company to take share in the short term. However, it is reasonable to assume that there may be a competitive response in the weeks ahead. Also, pricing remains very competitive and the company has the ability to sustain this for a period, as a result of significant stock orders for branded products that it placed before the referendum vote. These are sourced in the UK and priced in sterling, but given that most branded products are ultimately manufactured in other geographies, it is likely that orders from now on will be at higher cost, and this may correspond with seasonally higher volumes in the second half. As we set out in our initiation note, own brand purchases, comprising around 25% of the total, are purchased in US dollars. There is no formal hedging.
Gross margins are likely to rise in the short term as the benefits of the current pre-Brexit vote stock orders come through, before normalising as input and output prices stabilise.
European hub to open pre-Christmas
With its FY16 final results, the company set out its intention to open a number of small satellite distribution hubs in mainland Europe as part of its international expansion strategy. The objective is to allow European customers to enjoy a similar level of service to UK customers across a much broader product range, while at the same time reducing European delivery costs. Management now confirms that it expects to have its first European distribution hub operational before Christmas. How long before Christmas that actually occurs will determine what impact this has on trading this financial year. We expect further details on the plans with the interims in October.
The strength of European penetration, boosted by post-referendum developments, is reinforcing the value of having a European footprint. The development of European hubs is allowed for in our forecasts.
Added assurance to forecasts
Performance to date gives added assurance to our forecasts. In FY16, 66% of sales were in H2 and the run-up to Christmas remains a critical trading period. Pressure on the rest of the year has reduced, and run-rate growth to achieve our revenue forecast is now only 28% for the last eight months, against 37% for the year as a whole.
We are not changing our FY17 forecasts at present. They already expect considerable growth of 165% in PBT to £1.6m and 108% in EPS to 6.5p.
There is currently no indication of demand weakness affecting the company’s niche market (rather the opposite). But any impact later this year would affect the higher-volume part of its trading cycle, and we are therefore inclined to remain cautious for now.
In addition, margin in the second half may be affected by a number of factors, including:
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sales mix and in particular own-brand mix and range extensions,
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input prices (see above), and
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the timing of sales price actions.
We expect more clarity on the margin prospects with the interim results.
