Joules Profit Warning: Shares in Joules (LON:JOUL) were down 25% in early trade as a trading update for the half year predicted that the full year result would be below expectations. The fall has been pretty stark:
As we can see from this long-term chart, is Joules another lockdown winner? The share price was hit alongside everything else at the start of the pandemic and recovered. But since the summer, it has given up almost all of its gains and we are now approaching the price seen in 2020. That trend was evident even before the profit warning. However it should be said that this was not restricted to Joules and many companies have been hit – perhaps on the spectre of rising input costs. Big companies such as ASOS and Boohoo have also been massive losers over the same period.
What did the Joules profit warning say?
This comes in an update prior to the interim results. Points are scored immediately as we have a table of numbers – most handy. In fact the numbers read well: revenues have gone up and although there has been an acquisition there is organic growth. Unsurprisingly online has also grown quickly and now accounts for £63m of the £100m revenues in the Retail segment.
It seems like Black Friday wasn’t a hit here, owing to various issues:
The well-documented global supply chain issues have resulted in some higher costs and stock delays during the Period. In addition, labour shortages in our third-party operated distribution centre (DC) have resulted in extended product delivery times to online customers, stores and wholesale partners. These factors were particularly acute in November, including the Black Friday period, which alongside weaker year on year online traffic contributed to performance during this month being below expectations.
None of this is really a surprise, apart from the weaker online traffic. Quantified though, it seems that this has been pretty costly in terms of profits:
Considering these factors, Group profit before tax and adjusting items for the Period is anticipated to be in the range of £2.0m – £2.5m (FY21: £3.7m). Global supply chain challenges are expected to remain during at least the second half of the Group’s financial year and there is increased consumer uncertainty as a result of the emergence of the Omicron coronavirus variant. Supported by a strong stock position and wholesale orderbook, actions that have been taken to improve productivity at the DC, and the ongoing strong customer demand for the Group’s products, the Board is confident that the Group will achieve continued strong revenue growth in H2 and an improved profit performance. Nevertheless, full year profit before tax and adjusting items is now expected to be below current market expectations and in the region of £9m to £12m notwithstanding any further significant covid restrictions.
These expectations are not given, leaving us to find out for ourselves. A Liberum research note published in August 2021 had predicted a PBT of £15.4m. Thus, we can see that a £9m-£12m range is a pretty large drop. Thus the share price move is not surprising, given this.
Joules: The Business
Joules is an interesting enough company and may be just about familiar to some. It started originally as a business selling countryside-inspired clothing. These unique designs were a hit and since then designs have branched out into a wide range of clothes, homeware and accessories. Growth here has been slow but persistent. During the 2000s the company benefitted massively from internet shopping, then started to open their own stores. At a size of 133 stores, Joules stores now appear in every major town in the UK. The company also sells through partnerships.
A stock listing did not come about until 2016, which raised £77.5m to repay shareholder loans. The son of the original founder, Tom Joule is still involved in the business, albeit not full-time.
Trading since the listing has been good:
The 2020 figures may be eye-raising, but the year end date is 30 May; the pandemic was raging by then. This loss arises as a £21.5m impairment was taken on the valuation of their store leases. But it does go to show the nature of business. Most of that year did not have any restrictions at all, the final result was still a £2m loss. Having the expense of a store estate and no revenues coming in from that can be expensive, even if only for a few months. Additionally, most of the revenues are also UK/Ireland based.
Another interesting aspect is a slight change in strategy. As we can see from the Stockopedia figures, revenues are booked to grow sharply after this year. Some of this is down to the transformational strategy the company is embarking upon. This will see the brand being rolled out into a much wider range of products and sellers. The company also previously was not acquisitive, but has started down this path. Garden Trading was bought, and this offers a much different business from clothes as it sells home furnishings.
Whilst expansion is still on the cards, it is still pretty conservatively run. The Garden Trading acquisition will cost up to £12.5m – this is very small relative to the market cap of Joules. There also was a large equity raise at the start of the pandemic as well as a smaller one earlier this year. This has given the group a relatively large cash balance, although against this borrowings have increased. Also capex costs are significant here. As a store pitching to the middle to upper end of the market it must be important to keep stores looking up to date.
One thing that is noticeable is a disconnect between the wholesale and retail divisions. The retail side has always remained profitable throughout the pandemic. However the wholesale side has faltered both in terms of revenue and profitability. 2018 saw £55.5m of revenues and £11.4m segment profit. By 2021 this figure had reduced to £35.3m and a negligible loss. This is explained away by many of Joules wholesalers having a pandemic related sales drop. Thus not needing to order as much, requiring extra support or even not being able to pay their debts.
Either way, it seems that a recovery in overall performance could be instigated by the Wholesale division simply reverting back to prior performance. It could happen this year; inventories are at a much higher level and after 2 years of decline perhaps wholesalers stock levels will be lower. The kind of levels it was at show that this is an important aspect of the business. As Joules claim a strong order book, this could be beneficial for both revenue and profit.
Is the Joules profit warning a buying opportunity?
One thing to think about is whether the factors here are temporary or permanent. In terms of the brand Joules appears to occupy a decent niche which may be hard for an upstart to imitate, although it is not impossible. Trading pre-pandemic was also in a nice sweet spot, and it could very well be that we are above those figures now with the aid of the acquisition.
So a lot may boil down to input costs. Shipping issues I am inclined to believe will be transitory, although it evident that demand and supply have been mismatched recently. Pay could be an issue down the line. As mentioned in other warnings workers at the lowest level have a degree of flexibility. For instance a factory worker could become a fast food worker, if they were inclined. There seems to be a lot of competition with increased wages being the main tool. These wage rises won’t be unwound, and may still increase in future. Joules employs (as of 2021) 1,690 people and the average wage (£19k) implies that a lot of them will be lower earning. A bump in wages could easily add £2-3m to the wage bill, but this is quite significant if the PBT is single digit millions.
Despite this I quite like it. The price has come down a long way from its highs earlier this year, and since the last profit warning. For this, you are getting a profitable business which has been decently run, net cash positive as well as the prospects for future growth. It is not quite bargain territory for sure, but at the price I feel the pros outweigh the cons. 4/5.