Victorian Plumbing has cash to plug some gaps

Shares in bathroom retailer Victorian Plumbing (VIC) were up 3 per cent following the release of its results for the year to 30 September. Seemingly, investors worried about a repeat of last year’s disappointment when its results failed to live up to the hype surrounding its IPO, were assuaged by the news that the 2023 financial year was off to a “strong” start with sales up by 10 per cent.

Yet while the company had positive things to say about 2023, the numbers from the financial period in its results were far from stellar. Pre-tax profit dropped 40 per cent thanks to flat revenue combined with an increase in administrative costs and the cost of sales. The company pinned a lot of the administrative cost increase on the expected spending needed to grow a business – with marketing and property costs both increasing. 

However, not all of the administrative cost increases would have been foreseen, with staffing costs up 17 per cent due to this year's wage inflation. Nor would the increase in cost of sales have been part of the original business plan with “inflation both in product costs but also freight and distribution costs” hitting the bottom line as well as “the disruption caused by Covid-19 impacting our supply chain throughout the year”.

It's true that there was little Victorian Plumbing could have done about these outlays. It's also true there is little it can do if the economic situation worsens.

And it just might. Economists are forecasting the UK to fall into a year-long recession in 2023, while the inflation that hit Victorian Plumbing this year may not have peaked just yet. Even if the company’s “strong” start to the 2023 financial year’s sales continues, despite the threat of recession, profits won’t grow if the business continues to become more expensive to run.

Victorian Plumbing’s ace in the hole here is its net cash situation. Its coffers have filled since last year’s results, which is especially welcome news in a period when debt costs are soaring and cash is king. If the retailer can find a way to invest the money wisely, it could start to record the kind of profit growth that got investors excited about the business before the IPO. However, even with £40.5mn in the bank, that is a tough ask going into the UK’s third recession since 2008. We are less bullish about this company’s prospects than last year. Hold.

Last IC View: Buy, 91p, 10 Dec 2021