James Halstead posts record revenue but profits slide

Could now be the ideal time to buy into James Halstead (JHD)? The shares are trading at close to an eight-year low at a time when revenue is at a record high. On the morning of its half-year results release, analyst Panmure Gordon reiterated its long-standing buy rating for the flooring manufacturer.

As James Halstead will be the first to acknowledge, the past three years have not been easy for what it readily admits is a “simple business”. The company says that manufacturing and selling flooring should not be complicated, but Covid rudely interrupted what was shaping up to be its best ever year. Then, just as the business was recovering from the shock of the pandemic, record inflation hit.

Some issues have been self-inflicted, though. In October last year, we said that James Halstead ran the risk of being hit by the ‘bullwhip effect’ – whereby a company increases supplies to offset inflation but are then hit by weak demand – after its inventory rose to £112mn by 30 June last year, an 85 per cent increase on the prior year.

The fact that revenue hit record highs in its results for the last calendar year might look like vindication for its inventory strategy, but it is worth bearing in mind that the company “adopted a lag between absorbing costs and increases in sales prices”. In other words, it sold off a lot of its inventory glut at prices lower than it could have done. 

The company said that it took the hit from inflation rather than passing it on to customers in order to protect long-term relationships, and while there is likely a lot of truth in that explanation, it is also the case that its swollen inventory reserves meant that shifting its stock would have been a priority. Either way, the result is the same: despite record revenue, pre-tax profit is down. What’s more, due to the cost of increasing that inventory last year, net cash is down even further than it was at 30 June 2022.

This lack of available cash had a knock-on effect on dividend payments, which the company says will not increase. Dividends could go up next year, with analysts at Panmure Gordon and WH Ireland both forecasting that the company’s revenue will keep increasing and that pre-tax profits will return to growth as well, but we remain circumspect. Hold.

Last IC View: Hold, 201p, 3 Oct 2022