Howden Joinery Group PLC LON:HWDN, the UK manufacturer of kitchen units and joinery solutions, reported half-year results on Thursday 21st July. Despite lapping strong comparatives from the prior year’s home renovation boom, Howdens’ revenue growth was strong, with revenues 16.3% ahead of 2021 and 39.0% ahead of pre-COVID levels in 2019.
These results were primarily driven by organic growth, with like-for-like sales at Howdens’ depots up 13.5% year-over-year. Howdens grew the volume of kitchen units sold during the period, but the company also noted that proactive price increases have been taken throughout the year, which have aided growth.With inflation increasing, Howdens’ cost base rose by £25 million in the first half. However, Howdens’ price increases more than covered these costs and contributed to an increase in gross margin of 0.60% versus the prior year of 61.9%. Profits during the half were also strong. Strong cost control also aided Howdens in growing its operating profits by 20% to £149.1 million at an operating margin of 16.3%. Healthy profits at Howdens allowed for an increase of the interim dividend by 9.3% to 4.7p, and over half of the previously announced £250 million share buyback was completed.
On an operational view, the first half of the year saw Howdens opening 10 new UK depots, revamping 34 older UK depots, opening 7 new depots in France and opening their first depot in the Republic of Ireland. This brings the total number of depots to 831. The company launched 19 new kitchen ranges and increased its manufacturing and logistical capacity. During the half, Howdens also acquired Sheridan Fabrications Ltd., a leading industry specialist for the manufacture and sale of kitchen countertops for a cash consideration of £15 million.
High praise from the city
Whilst the production of kitchen countertops may seem like a dull business, Howden Joinery has received high praise from fund managers and analysts in the city since entering business in the 1990s. Howdens has a unique business model, only selling to trade customers (builders, kitchen fitters, carpenters etc.) and refusing to do business with DIY customers. Howdens manufactures products in-house and chooses to hold much more inventory than is typically required. It also provides next-day delivery compared with a minimum of four weeks for most of their competitors.
This operating model results in a superior level of product availability and quick turnaround time, which is highly appealing to the end consumer but also to tradespeople running their own businesses, as it means sales, profit and cash are delivered more quickly than with alternative suppliers. These dynamics result in a strong preference for Howdens from trade customers, and thus, they often recommend Howdens’ kitchen ranges to the end customer. Baillie Gifford, Howdens’ largest institutional shareholder, made the below comments in a recent report in March 2022.
The business has traded impressively in recent years despite the often-tough economic backdrop. This is partly due to the opening of new depots but also because its customer-centric business model has proven to be very successful. We think Howdens has good growth potential as it continues to grow organically and as its newer depots become more profitable. In addition, we see significant long-term potential from replicating its successful, trade-focused UK model in the less mature French market.
Baillie Gifford
Howden Joinery International expansion
Whilst the UK will remain of significant importance for Howdens in the years to come, the group is increasingly looking to overseas markets to boost its growth prospects. The group’s European operations are largely centred in France, with 42 depots as of the first half, where Howdens believes the market dynamics are similar to the UK, with an even higher propensity for end customers to purchase directly from DIY chains. Howdens has been opening depots in small ‘clusters’ within dense urban areas to build trust and awareness with local trades. Trading from French depots was a success during the first half, with sales up 18.5% on a same depot basis. Howdens expects the group to have 60 depots in France by the end of 2022.
Howdens also announced its intentions to roll out a network of depots in the Republic of Ireland, starting with five depots to be built around Dublin in 2022. The network of depots in Ireland will be serviced from the existing infrastructure in the UK; they are likely to be a profit-enhancing expansion.
Long term opportunity for Howden Joinery
With the increase in depots to 788 in the UK, Howdens has continually surpassed its own expectations for depot growth in its most mature market (previous target in 2010 was 650). In the latest update to the market, Howdens now expects there to be potential for ‘at least 1000 depots in the UK’, which will provide many years of store expansion and growth from depot roll-out initiatives in Europe.
Management has also increased its estimation of Howdens’ total addressable market in the UK for kitchen and joinery products to £11 billion, with the kitchen market estimated at around £6.5 billion and the fragmented UK joinery market at £4 billion. With Howdens’ UK revenue of around £2.0 billion a year, management view the UK as a significant long-term opportunity to increase market share and consolidate fragmented kitchen supply chains.
Valuation
With recent pressure on equity valuations, and the market wary of a somewhat cyclical end market such as home renovations, Howden Joinery’s share price has taken a beating this year, down 30% YTD. This has resulted in an undemanding forecast P/E rating of 11.2x for the company, bringing the valuation well below the average over the last decade.
Whilst the group suffers from being classified as cyclical, in its latest update, Howden Joinery shared that their worst year in 27 years of operating history resulted in only a 7% decline in sales and 2% reduction in gross margins. If it is the case that we enter a period of softness in discretionary home renovation, Howden Joinery looks as though it can navigate the challenge.
