H&T using its golden windfall well

Pawnbrokers typically thrive in a recession and H&T saw an uptick in business during 2008 and 2009. But, unlike previous cycles, even when the economy improved, their business continued to grow strongly. That was partly down to the soaring gold price, but also resulted from extra investment in H&T's chain, which was funded by the windfall trading profits.

Last year, gold buying produced exceptional profits of £20m. Although management initially guided down the City's expectations for this year, the gold price has continued to rise – and that prompted management to upgrade expectations when the company reported first-half profits for 2011 last month.

The company now has 150 stores. Of thess, about half have only been opened in the past five years and so they are not yet at peak trading. Expansion is on course for 25 more stores this year and the scope of the business has also been widened by the presence of 45 Gold Bars, small-scale units set up in shopping centres to encourage consumers to sell their gold. Sometimes Gold Bars become permanent stores within shopping centres, but smaller than the typical H&T outlet. Management has a long-term target of 250 stores.

Within the established estate, the average size of the pledge book is three-and-a-half times that in the newer outlets. That suggests the newer ones take several years to reach maturity, so there should be significant latent growth in H&T.

While gold-buying has provided windfall profits, traditional pawn-broking activities have continued to trade strongly. In the opening half of this year, the pawn service charge increased by 14 per cent to £13.2m and the pledge book grew by 10.5 per cent to £41.2m, making H&T the biggest pawnbroker in the UK. Pawnbroking accounted for 66 per cent of profits in the first half.

Retail sales have been under pressure, but the group managed to mitigate the effect in the first half through better stock control, pricing and distribution. The vast majority of stock is second-hand gold held at cost to the group, which is significantly less than its realisable value.

H&T also has cheque-cashing and pay-day advance operations, which are performing solidly. These generate 9 per cent of group profit.