- Wallpaper-to-fabrics firm cites weak UK demand and input cost pressures
- Profits for current year to come in a fifth below expectations
- Shares fall by a similar degree as AIM All-share member reviews its cost base
“Even wallpaper-to-fabrics group Sanderson Design’s rich heritage and strong brand portfolio, which includes Zoffany, Harlequin, and Morris & Co, is not proving enough to protect it from the combination of weak demand in the UK and input cost pressures,” says AJ Bell investment director Russ Mould. “The AIM All-Share index member’s board is now steering underlying pre-tax profit forecasts down to around £8 million for the fiscal year to January 2025, compared to £12.2 million last year and – more importantly – a consensus forecast of £10 million.
“That one-fifth shortfall relative to expectations helps to explain the near-20% plunge in the share price which is at its lowest level since Christmas 2020, when the pandemic and lockdowns continued to shape consumers’ spending patterns and dominate market sentiment.
Source: LSEG Datastream data
“While it is tempting to tag Sanderson Design as a luxury goods firm, thanks to its well-tended and powerful range of brands, its operating margin tends to hover around the 10% mark, well below the 20%-plus which Burberry is targeting (albeit without much success right now) and which is regularly reached or exceeded by the true plutocrats’ brands of choice, such as those controlled by Richemont, Kering and LVMH.
Source: Company accounts
“They may operate in different fields, and not focus on home furnishings, but their ability to weather input cost pressures by managing prices is one of the features that defines them.
“Sanderson Design is finding it harder to manage such challenges, as also befits a smaller company, despite the very high profit margins generated on its licensing activities. The branded product and external manufacturing operations are likely to be front of management’s mind when it comes to the review of the company’s cost base in the UK. Capital expenditure is also being reassessed as Sanderson Design responds to the anticipated drop in adjusted pre-tax income.
Source: Company accounts, Marketscreener, analysts' consensus forecasts
“Sanderson has been here before, when it was known as Walker Greenbank. A flood at one factory, a fire at another and a profit warning hammered the share price and persuaded then chief executive John Sach to step down. The combination of new leadership, £3 million in cost savings, an improved online and digital offering and a strong balance sheet helped see the company through those difficult times and then the pandemic.
“Sanderson has a net cash balance sheet now, even adjusting for £5 million in lease commitments, and it has also taken its pension liabilities off balance sheet, via a transfer to a third-party in exchange for a cash payment.
Source: Company accounts
“This financial solidity means that the clock is not ticking, and management has time on its side, although inventory days have moved up as sales have slowed down. Whittling this down to release more cash, ideally without resorting to any discounting, would offer reassurance on future trading.
Source: Company accounts
“And that is the question which may be exercising investors now, since profit warnings tends to come in clusters – is another disappointment on the way?
“It is possible and in some ways the share price is already expecting further trouble. At the end of fiscal 2024, Sanderson Design had net assets of £87 million, of which £59 million were tangible assets (the remainder being intangibles such as brands). The company’s market capitalisation is down to just £60 million, or one times tangible book value, the sort of price tag attached to a firm where further trouble, or even consistent losses, are expected. It does not feel as if Sanderson is in such dire straits, especially given the balance sheet, so contrarian, risk-tolerant, small-cap specialist investors may be wondering whether any further alerts will be the time to take a much closer look.”
