Colefax is an international designer and distributer of luxury furnished fabrics and wallpapers and an international decorating company. It designs, markets, distributes and retails furnishing fabrics, wallpapers, trimmings, related products and upholstered furniture in the UK and overseas. They also sell antiques, interior design services, decorating and furnishing for private individuals and commercial firms. They are listed on the AIM. Sales are split into the product division and the decorating division under brands that include Colefax and Fowler, Cowtan and Tout, June Churchill, Larsen and Manuel Canovas. They have offices in the UK, the US, France, Germany and Italy.
The group does not manufacture any fabrics and wallpapers so they are sourced from third party suppliers, mostly in Italy, France, Belgium, the UK and India. They sell primarily to interior designers and retail fabric and wallpaper shops and apart from two retail outlets in London, there is no direct retail activity. In addition to the core fabric and wallpaper brands, the group owns a UK based luxury sofa manufacturer Kingcome sofas. Production takes place at a freehold factory in Devon and the sofas are a relatively small part of the group.
The group also owns a luxury interior design business trading as Sibyl Colefax and John Fowler and this activity is the original business from which the rest of the group evolved. It undertakes interior design and decoration projects primarily for high-end residential customers. The division also encompasses a decorative antiques business which complements the interior design and decorating business. The group has now released its final results for the year ended 2015.
Overall revenues declined during the year as a £2M growth in product revenue was more than offset by a £3.2M fall in decorating revenue. Cost of sales also declined however, so gross profit increased by £419K. Distribution and marketing costs were up £700K and there was a £460K detrimental swing on exchange rate gains and losses which were offset by an £850K fall in other admin costs to give an operating profit some £115K ahead. There was a slightly lower loan payment and taxation to give a profit for the year of £3.5M, an increase of £189K year on year.
When compared to the end point of last year, total assets increased by £1.1M driven by a £2.6M increase in cash and a £355K growth in the value of leasehold improvements partially offset by a £1.2M fall in inventories and a £442K decline in trade receivables. Total liabilities declined during the year, mainly as a result of a £508K fall in payments received on account. The end result is a net tangible asset level of £23.8M, a growth of £1.5M year on year.
Before movements in working capital, cash profits increased by just 65K to £7.1M. There was a cash inflow from working capital due to a decrease in inventories due to timing differences in the launch of new fabric collections, and receivables due to a reduction in debtors in the decorating division, and after a broadly flat tax payment the net cash from operations was £7.1M, a growth of £3.8M year on year. The group spent £2.2M on property plant and equipment to give a free cash flow of £4.9M. This was spent on dividends (£472K) and the purchase of their own shares (£1.6M) to give a cash flow for the year of £2.9M and a cash level of £6.9M at the year-end.
The results this year reflect a good performance from the fabric division with an increase in operating profits of 28% to £5M mainly due to the continued recovery of the US market and a significant strengthening of the US dollar in the second half of the year. In contrast the decorating division had a challenging year reporting a loss of £139K on sales down 28% reflecting the fluctuations in the timing of major products and a weak trading environment for antiques.
The profit in the product division was £3.7M, an increase of £1.1M year on year. In the fabric division, sales in the US, which represent 56% of the division’s turnover increasing by 7% on a constant currency basis. The market in the US continues to improve and the group are confident that market conditions will remain positive for the remainder of this year. They have taken over the distribution of their product from their agent in Boston and will be opening a new showroom within the next year. They now operate their own showrooms in seven of the major US territories and these account for about 65% of sales in the market.
Sales in the UK increased by 1% during the year. In the second half of the year the high end housing market was adversely affected by the threat of the mansion tax and a significant increase in stamp duty. Whilst the mansion tax threat was removed following the election, the rise in stamp duty is having a negative effect on high end housing transactions. Overall the board are optimistic that this market will perform well in the current year, however, due to the underlying strength of the economy.
Sales in Continental Europe were down by 7% but flat on a constant currency basis. There has been little improvement in any of the major markets in the continent and trading in France, the largest market, remains challenging. The board believe that the dual benefits of quantitative easing and a much weaker exchange rate will provide a boost to Eurozone economies, however, and help to improve trading conditions in the second half of the year. They are seeing some benefit from the new showroom in Milan and there are encouraging signs of an improvement in some of the smaller European markets but they will not have a material impact on the overall result. Sales in the ROW increased by 3%. In Australia, China and the Middle East, they are seeing reasonable growth but this has been partially offset by a significant decline in Russia.
Sales of sofas increased by 8% to £2.45M and operating profit increased from £24K to £171K. Market conditions for high end furniture have continued to improve and the group are continuing to explore opportunities for this division to make a more significant contribution to results.
The loss in the decorating division was £119K, a detrimental movement of £859K when compared to last year. This is a disappointing result which mainly reflects the uneven timing of major projects. In addition, they experienced a decline in antique sales and with demand for antiques remaining subdued, they do not envisage a significant improvement in this part of the business so they are cautious about prospects for the year ahead despite a reasonable level of decorating deposits.
The group currently doesn’t have any bank debt but it has various facilities available to it amounting to £3M. They are somewhat susceptible to exchange rate risk between Sterling and US dollars with a 1c deterioration in the dollar against sterling reducing profit by £94K. Other risks include the market reaction to new products, a downturn in the housing market and the risk of obsolete inventory.
It is worth noting that the CEO and Chairman, Mr. Green, owns nearly 34% of the company’s shares and he earns an astonishing £717K a year which is very substantial for a company of this size. In fact, the £1.5M spent on directors is a considerable amount in my view considering operating profit is just £5M.
Going forward, trading in the US and the UK continues to improve and the board are optimistic about further growth in the core fabric division. Continental Europe remains difficult but they are hopeful that trading conditions will start to improve in the second half of the year. Although they are cautious about prospects for the decorating division, they expect to see increased activity in all the other areas of the business and are therefore optimistic about their overall performance.
At the current share price the shares are trading on a PE ratio of 15.6, falling to 13.5 on next year’s consensus forecast. After a 5% increase in the total dividend, the shares are currently yielding just 0.9% which is expected to remain the same next year although the group did return £1.6M of surplus cash to shareholders by purchasing 418,982 shares during the year representing 3.7% of the total share capital.
Overall then, this has been a fairly good year for the group. Profits were up despite declining revenue, net assets increased and the operating cash flow improved to give plenty of free cash, although this was due to a cash inflow from working capital due to the timings of new product launches and cash profits were broadly flat. The fabric business is performing well, mainly due to a strong market in the US, aided by favourable forex movements. The UK market was somewhat effected by the increase in stamp duty whilst in Europe, conditions remained mixed with the weak Euro not helping. The sofa business seems to be performing well, although this still makes up only a small proportion of results, but the decorating business found going tough due to the timing of large projects and a subdued market for antiques.
I am a little concerned about the control exerted by the exec chairman and his excessive remuneration but with the US market remaining strong and a forward PE of 13.5, this careful company seems quite interesting to me. The dividend yield is not much to write home about at 0.9% but the company did buy back some of its own shares (representing 3.7% of the total share capital) so shareholders are being rewarded here too in addition to the directors.
On the 17th September the group released an AGM statement. They stated that so far this year, overall trading has been broadly in line with expectations. In the fabric division, total sales for the first four months of the year increased by 1% and were flat on a constant currency basis. That seems a little subdued to me.