Colefax has now released their final results for the year ended 2017.
Revenues increased when compared to last year as a £270K decline in Furniture revenue was more than offset by a £3.7M growth in Fabric revenue and a £200K increase in Decorating revenue. Depreciation was up £533K and other cost of sales increased by £2M to give a gross profit £1.1M higher. Operating expenses grew by £3.1M, which included a hedging loss of £2M, which meant that the operating profit fell by £2.1M. Finance costs were broadly similar so after tax charges declined by £513K the profit for the year was £1.9M, a decline of £1.6M year on year.
When compared to the end point of last year, total assets increased by £3.3M driven by a £2.6M growth in receivables, a £2.1M increase in property, plant and equipment and a £1.4M growth in inventories, partially offset by a £3.4M decrease in cash. Total liabilities also increased during the period due to a £2.7M growth in payables, a £734K increase in deferred tax liabilities and a £533K increase in deferred rent. The end result was a net tangible asset level of £25.9M, a decline of £382K year on year.
Before movements in working capital, cash profits declined by £1.5M to £5.7M. There was a cash outflow from working capital and after tax payments were broadly flat, the net cash from operations came in at £2.8M, a decline of £3M year on year. This didn’t cover the £4.1M spent on property, plant and equipment and there was a cash outflow of £1.3M before financing. The group also spent £478K on dividends and £2.6M on own share purchases to give a cash outflow of £4.3M and a cash level of £6.7M at the year-end.
Sales in the Fabric division were up 5.5% due to favourable forex movements. They were down 6% on a constant currency basis, however. The operating profit reduced by £1.7M to £2.8M due to the hedging loss of £2M. The main reason for the decline in sales was adverse trading conditions in the US market where sales decreased by 7.7%. The rate of decline slowed during the year with the first half down by 10% and the second half down by 6%. In the run up to the US election there was considerable political uncertainty which the board believe impacted spending in the luxury end of the market. They opened a new showroom in Boston in October and a new showroom in Atlanta in February.
Sales in the UK were down 1% reflecting fairly challenging conditions at the top end of the market. Trading conditions are closely linked to the health of the high end housing market and there has been a significant decline in high end housing transactions over the last year, linked to changes in stamp duty.
Sales in continental Europe increased by 7% but reduced by 6% on a constant currency basis. France, Germany and Italy all saw relatively difficult markets. France was down 5%, Germany by 9% and Italy by 4%. Sales in most other European countries were slightly lower compared to last year but there are tentative signs of a pick-up in the overall economy. Sales in the rest of the world decreased by 2% during the year and current market conditions mean that the region remains a relatively small part of overall sales.
Sales of Kingcome furniture decreased by 10% to £2.4M and as a result, the operating profit fell by £240K to £23K. The business has been adversely affected by the slowdown in the high end housing market in the UK. Customer deposits ended the year up by 21% compared to the prior year but management expect conditions to remain challenging. Export sales represent an opportunity for growth, especially given the decline in the value of Sterling since the Brexit vote.
Decorating sales increased by 3% but profits fell by £113K to £108K. It was a transitional year for the division due to the move to the new showroom in Belgravia which opened in February with the initial market reaction exceeding management expectations. The new location is better suited to the needs of the business and whilst they have significantly reduced their investment in antique stock, antique sales have been encouraging. Customer deposits are now well ahead of last year and the decline in Sterling has encouraged an increase in the proportion of overseas customers.
Going forward, the board is cautiously optimistic about prospects for the year ahead. In the US, they have seen a steady improvement in confidence since the presidential election and sales for the first two months of the new financial year are ahead of the prior year and budget. Sales in the UK and Europe are also ahead of last year but the board remain cautious about growth prospects in those markets. The weakness of Sterling against the dollar is very positive for the business but they will not fully benefit this year due to ongoing hedging put in place prior to the Brexit vote, which is likely to give rise to a charge of just over £1.2M.
At the current share price the shares are trading on a PE ratio of 27.1 which falls to 20.2 on next year’s consensus forecast. After a 4% increase in the final dividend, the shares are yielding 1% which remains the same for next year’s forecast. At the year-end the group had a net cash position of £6.7M compared to £10.1M at the end of last year.
Overall then this has been a difficult year for the group. Profits fell, net assets declined and the operating cash flow decreased with no free cash being generated. The main issue seems to have been the lack of confidence in the high-end housing market in the US relating to the election. The rate of decline has slowed, however, and actually reversed so far this year so things might be improving? There are also issues in the high end housing market in the UK due to changes in stamp duty. Although things are improving, most markets still seem to be rather tricky and I think the forward PE of 20.2 and yield of 1% makes the shares look a bit expensive. I am not buying in here quite yet.
On the 14th September the group released a trading update where they stated that current trading is in lie with management expectations. In the core Fabric Division, sales in the US for the first four months of the year are up by 4% on a constant currency basis. In the UK, sales were up 3% and sales in Europe were up 4% at constant currency so this actually doesn’t seem that bad, although the shares still look too expensive to me.