Headlam swings to first-half loss, pushes recovery outlook back

17th Sep 2024 07:19

(Sharecast News) - Floorcoverings distributor Headlam Group reported an underlying operating loss of £13.1m for the first half on Tuesday, swinging from an £8.2m profit in the same period last year.

The London-listed firm said revenue declined 11.8% to £292.5m from £331.8m, impacted by market volume decreases and a lack of price inflation.

It said the UK market saw an 11.3% revenue decline, while continental Europe experienced a 15.9% drop.

Despite overall declines, the trade counters and larger customers segments grew by 7% and 2%, respectively.

Amid challenging market conditions, Headlam maintained a strong balance sheet, as net debt slightly decreased to £28.3m from £29.6m, with £72.2m in cash and undrawn facilities available at the end of the period.

The company said it effectively managed working capital, reducing stock levels by £22.6m compared to the prior year.

Additionally, the group owned property valued at £142.1m, with the completion of a pension buy-in further strengthening its financial position.

In response to the downturn, Headlam launched a two-year transformation plan to simplify its business and enhance customer offerings, aiming for at least £15m in annual profit improvements and £70m in one-off cash benefits.

A key aspect of the plan involved consolidating 32 trading businesses into a single national entity called Mercado.

The move was expected to provide customers with a broader, unified product range and allow sales teams to focus more closely on specific geographic territories.

It said it also planned to optimise its distribution network by opening new facilities in Rayleigh, Essex, and Ipswich, while closing and selling surplus properties, including the existing Ipswich distribution centre and consolidating two centres in Scotland into one.

Operational efficiency would be further improved by centralising back-office processes and support functions, unlocking additional cost savings.

The transformation was anticipated to incur around £25m in one-off cash costs, with benefits beginning to materialise during 2025 and fully realised by the end of the two-year period.

Headlam said it had secured full support from its lending banks, recently agreeing to a new covenant package through the end of 2025.

For July and August, group revenue declined 8.4%, showing an improvement compared to the 11.8% decline in the first half of the year.

That was aided by four consecutive months of reduced revenue decline in the regional distribution segment.

However, the company noted limited signs of market improvement and now expected a return to growth at some point during 2025, later than previously anticipated.

The market was currently at least 25% lower in volume terms compared to 2019.

Despite the challenges, Headlam said it was optimistic about its long-term prospects.

The company reaffirmed its ambition, set in March, to achieve revenue between £900m and £1bn.

"The challenges impacting the flooring market have been well documented and are fully reflected in Headlam's performance in the first half of 2024," said chief executive officer Chris Payne.

"Nevertheless, the group has made good strategic progress and whilst these highlights are masked by external headwinds, it is particularly pleasing to see growth across the group's larger customers and trade counters.

"As the clear UK market leader, drawing on a heritage of over 30 years, a large and diverse customer base, and long-established supplier relationships, Headlam has a unique long-term opportunity."

Payne said that while the company could not control the macroeconomic environment, it could continue to adapt and evolve the business to take full benefit of the market recovery.

"I'm therefore pleased to announce today an acceleration of our strategy with a two-year transformation plan to make Headlam a more effective organisation by simplifying our offer to customers and how we operate.

"As we unlock cash and costs from our business, we will further invest in the proposition across all our customer groups in order to grow market share and strengthen our position as the UK's leading floor coverings distributor.

"Looking ahead, the lead indicators for consumer spending on home improvements are more positive, albeit the timing of recovery remains uncertain and is likely to be later than previously anticipated."

However, with its new transformation plan underway, Chris Payne said the company's teams were "laser-focussed" on realising the benefits which would start to take effect in 2025, positioning the group to emerge strongly when market conditions improved.

"We remain confident in the long-term outlook for the group and look forward to announcing further progress against our plans in due course."

At 1055 BST, shares in Headlam Group were down 6.36% at 143.74p.

Reporting by Josh White for Sharecast.com.