Do luxury goods offer resilience for tougher times ahead? Here's what our companies analyst thinks about this AIM company that's quadrupled in value.
Latest interim results from Sanderson Design (LSE:SDG), a £143 million supplier of luxury fabrics and wallpaper, raise a tactical question right now.
Do high-quality branded goods offer an element of “defensive” investment because this segment can withstand a generally harsher consumer environment?
Or, have such goods – especially where related to a buoyant housing market – enjoyed strong demand on the back of money creation and limits in travel, that is simply too good to last?
Looking back to the 2008 crisis and among international big caps, London-listed Burberry Group (LSE:BRBY) was a strong performer in the aftermath – versus sluggish consumer sales generally. In recent years, its chart has consolidated, but Paris-listed, Moet Hennessey Louis Vuitton (EURONEXT:MC) boasts a very strong long-term chart – especially since 2016.
They exemplify how “luxury” has done well as wealth polarises in modern society, a trend that seems to intensify.
Shares quadruple amid lockdown spending and housing boom
I set out a “buy” stance for Sanderson Design at 53p in August 2020 on the basis that a recovery in home sales – especially those larger and in the countryside – would boost interior refurbishing. Lockdowns also meant people were sat in four walls with cash to spare. The likes of Sanderson – in luxury fabrics and wallpaper – looked set to capitalise.
By early 2021, the stock had re-gained its pre-Covid high of around 90p, and there has been a consistent bull run as high as 234p a month ago. Recent risk aversion towards UK small caps has however seen profit-taking to around 200p currently.
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This represents a forward price/earnings (PE) multiple near 17x if expectations for a recovery in net profit to near £9 million are fair. It is as if the market respects “recovery becoming growth” credentials, as the work of a new CEO from spring 2019 increasingly bears fruit. But the market is also wary about chasing the stock onto a growth-type multiple, lest its association with housing proves somewhat cyclical – and once an exceptional boost from lockdown spending abates.
Operating profit is quite similar to first-half 2019
For its six months to 31 July, Sanderson has declared £6.0 million normalised pre-tax profit versus £4.9 million in the pre-Covid comparator of first-half 2019.
Covid’s initial impact had been to close group factories, hence the group traded around break-even in its 2020 year.
Revenue versus 2019 has not advanced so significantly - up barely 3% to £57.5 million.
Nor were operating costs materially cut; those for distribution and administrative costs have kept pace. Operating profit versus first-half 2019 was quite similar; the differential was in adjusting factors and eliminating finance costs.
It seems reasonable to expect an 8.6% operating margin at least not to grow in the short term, given the company's outlook statement refers to “mitigating the potential impact” of cost and supply chain issues. A UK manufacturing base seems likely to involve rising costs albeit with far less chance of supply interruptions, importers now face.
The 31 July balance sheet also shows a £4.7 million pension deficit which is nearly halved on last year, but may require some cash in future, according to actuarial valuations. It was however in context of £71.5 million net assets, 39% of which are intangibles albeit reasonable for a “brands” group.
So, sales need to keep growing well to reinforce the image of Sanderson Design as reliable compared with mixed numbers and narrative when the group was called Walker Greenbank.
|Sanderson Design - financial summary
|year end 31 Jan
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|Source: Historic Company REFS and company accounts
Nearly half of group sales are internationally derived
Success overseas does mitigate risk that UK sales could temper after expiry of stamp duty relief and an ongoing shortage of homes for sale means fewer people moving.
Some 48% of £43.3 million branded product sales were international, with £2.0 million group licensing income relatively small. Yet it looks set to grow after “a number” of deals in the current financial year include one in Asia and another in the US, both for the Morris brand.
Such an international profile raises odds that, in the longer run, Sanderson will get acquired by a luxury brands group – or possibly UK retailer seeking to expand overseas sales.
Operating cash flow has nearly doubled to £7.3 million, but eased slightly to £4.6 million at the net operating level due to a £5.0 reduction in trade receivables.
A big jump in net cash from £4.5 million to £15.4 million is described as “particularly noteworthy”. However, note nine does not clarify how this extent of increase has happened, nor does the financing side of the cash flow statement justify it.
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Anyway, the interim dividend is restored with a 0.75p a share pay-out, up from 0.52p in 2019. Consensus anticipates a 3.4p total dividend implying just a 1.7% prospective yield – or 2% based on 2023.
Perception is therefore going to focus on growth credentials, where the outlook statement cites manufacturing and licensing income sales remaining robust – offsetting a slight weakening in brand sales.
While the key autumn selling weeks have just started, Sanderson says “we remain confident of the board’s expectations for the full year.”
This implies a real test of the question I initially posed: how insulated are more affluent people from cost pressures starting to afflict the general public? Last year saw a 7% sales uplift during October and November, though we may again have to wait until around 21 December to know.
A median view could be for a modest sales improvement, albeit one which mitigates rising costs rather than affirms solid growth in net profit.
Another licensing agreement with Next
The Next (LSE:NXT) deal covers the Morris & Co brand of homewares - bed-linen, cushions, curtains, blinds, rugs, wallpaper and lighting – further to a deal a year ago for Morris apparel which is proving successful.
Launching in early 2022, this latest tie-up is expected to last three years, and Next’s CEO remarks on Morris’s “outstanding designs and enduring brand…for consumers in the UK and beyond.”
This appears to capture well, the likely scenario going forward: Sanderson continuing to evolve longer-term, possibly helped to some extent by more affluent people.
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In the short to medium term, however, I would mind the possibility that a rise or two in interest rates may check the housing market. Even high net worth people are apt to gear up when buying fancy homes .
So, there is a case to lock in some gains here.
CEO with a strong background in luxury goods
This is a key reason to retain an interest. Lisa Montague had previously been with a Spanish luxury fashion house owned by LVMH Group and also worked at Aspinal and Mulberry (LSE:MUL) – therefore is skilled with developing UK and international brands, from manufacturing to distribution.
My sense is that capable management will help Sanderson weather a possible consolidation of sales growth, while also raising long-term takeover potential – and you never know when this might happen.
Indeed, if the next year or so leads to further “risk-off” mentality towards UK small caps, and a mixed narrative on sales/costs, it could be a perfect opportunity. Overall, therefore: Hold.
Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.
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