Victorian Plumbing Shares Crash As Outlook Disappoints

Victorian Plumbing Profit Warning: Shares in online supplier Victorian Plumbing Group (LON: VIC) sank 40% this morning as a cautionary note in their full-year results spooked investors. The morning fall was bad enough:

However, it would be the overall performance which would have left investors dismayed. The business has only been listed since this summer and was at an initial price of 262.5p, which promptly got bid over 300p. So any early holders will be now sitting on a massive loss. It will be of little consolation that there have been several stocks which have been beneficiaries of the pandemic which have also seen massive falls. Made.com also listed in the summer and today announced a mild profit warning. It may be speculated that the business case of Victorian Plumbing looked better, given that it was growing sharply and crucially also profitable at the time.

What did the Victorian Plumbing profit warning say?

This comes in the full-year results, and perhaps the fall was due to trying to be mealy-mouthed about it. After all, management must have spent a long time this year being uber-bullish about their prospects. There is a lot of good news to start: active orders and average order values are up. Profits are also up, once we adjust out the one-off IPO costs and share payments.

Bad news starts in the outlook:

As we reported in our full year trading update on 7 October 2021, we
experienced more subdued market conditions during the summer months following
the easing of restrictions, before customer demand improved somewhat during
September.

This is quantified as such:

Through the first two months of FY22, whilst consumers have continued to spend
more on leisure and less on big ticket material homeware purchases, demand and
revenue have been broadly the same as last year and 41% ahead of FY20.

The reference to FY20 is a bit of a red herring, as people are paying up for growth every year. Revenue being flat actually represents quite a large miss, as broker forecasts were for c.15% growth in revenues. It doesn’t end there:

The adaptability of our supply chain and investment in-stock inventory means
we are currently operating from a position of strength relative to others.
Given the popularity of our own brand offering, we are able to absorb most of
the current supply chain pressures. However, as we look to balance revenue
growth with profitability in the short-term, gross margins may move closer to
those achieved in FY20.

As we move through this changing consumer environment, we are being even more
aggressive on our marketing approach to further increase our market share in
line with our long-term growth ambitions.

Again the reference to FY20 is a bit of a diversionary tactic. Gross margins in FY21 were 48.55%, and FY21, 44.08%. So all things being equal, if that is replicated throughout the whole year, similar revenues equals less profit.

With a year end of Sept 30, the FY22 results will mean that unlike previous years that these results will be absent of any major restriction. (This assumes the new Omicron variant does not get worse). With many people likely to take their first ‘big’ holiday for a while in 2022, what does this mean for homeware purchases? This is quite uncertain.

The Business

Victorian Plumbing has a long history. Founded in 2000 by entreprenuer Mark Radcliffe, it has grown to be the largest online bathroom retailer in the UK. Much of the growth has come recently as the company transitioned from a Liverpool-based showroom to national retailer. It also has broadened out by manufacturing its own brands, giving its website a comprenhensive selection of items. This operating model is quite similar to Gear4Music, who also retail a mixture of brands and own-brand products.

In some ways this was a textbook way on how to do an IPO, at least from the founders side. It is clear that Covid gave many businesses like these a rocket. For one, competitor showrooms were closed. Secondly, people’s incomes actually improved through the various government schemes and reduced expenses. Thirdly, with a lot of people having much more time on their hands spent at home, it is likely that many improvements were taken on. Lastly, the housing market also got an unexpected boost with the stamp duty holiday.

Here is how the finances have improved:

To be fair, it seems like the improvements were already happening by the time the listing occured and the lockdown accelerated them. However, the listing was more of a way for the owners to cash out. Insiders sold c.110m shares which was around a third of the company and pocketed £285.9m. The company itself issued another 4.4m shares but this was to merely cover expenses: £11.6m raised became £1.8m after fees.

There are many medium and long-term objectives here – to develop new products, strengthen supply chains as well as enter new markets. However the latter has been the downfall of several companies. Despite assuming places such as France, Germany or Spain has ‘similar’ demographics, actually successfully developing a good position can prove to be difficult, as AO World found out.

However in terms of liquidity there seems to be little to worry about despite the share price decline today. The company was always prudently run and carries negligible borrowings. Only running a few (3) warehouses in the cheaper parts of the country has also meant its lease liabilities are also very modest. Unlike Made.com the company were also profitable prior to listing. There are also very low capex requirements and a modest amount of website development costs are capitalised. The result has meant that there is a very good conversion of cashflow to profits although a good chunk of this was paid out as dividends. Cash stands at £32.7m, which is a safe position, albeit new initiatives could eat that up.

Is the Victorian Plumbing profit warning a buying opportunity? 

To my mind this is a great lesson on why to be wary of IPOs. Often we could ask, who benefits? In the case here it was not the holders who picked up the shares from the sellers. It may even be possible that the sellers already had an idea that a normalisation would happen.

However we can only deal with the here and now. The price has fallen hard, and what has happened here is that originally the company was priced for growth – and now it is not. At the top, this would have had a c£1bn valuation. To me that is way too much, although some may argue that own brands and market positioning demand a better than average rating.

One aspect which may be worrying is the ‘aggressive’ marketing approach. Marketing costs comprised more than two-thirds of all admin costs, and virtually all business (95%) is online. It therby may follow that most advertising is online as well. Being more aggressive may simply mean just outspending your competitors on keywords – and these competitors are not small companies either.

This is not a bad business, and far from it they have done very well to gain market share. Evidently this has been done by offering good prices and serving customers well, a good combination. However I do feel that sustaining the growth trajectory will be really difficult in terms of profits, and rightly the share has been re-rated. The price seems about right for now. 3/5.

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