Coats focuses on market share and efficiency

Threads business Coats (COA) is trying to trim costs as much as possible. Revenue declines are inevitable as customers destock after they packed inventories during the pandemic. But the aim for management is to take market share and protect margins as it happens. So far, there is success on both these fronts.

In the six months to June, organic revenue and adjusted operating profit dropped 19 per cent and 21 per cent, respectively. This was driven by the 20 per cent drop in Apparel organic revenue where customers are destocking. Apparel makes up more than half the company's revenue.

This destocking is why UK shop prices dropped 0.1 per cent month on month in June. However, management was pleased to see market share rise 100 basis points to around 24 per cent. Management expects sales to start picking up again in the second half of the year.

The other promise management is making is for even more efficiency pushes. This half it delivered $21mn (£16.8mn) of efficiencies and it has increased its 2023 guidance from $20mn to $30mn. It expects overall savings to hit $70mn by 2024. In the same year, the hope is for adjusted operating margin to expand to 17 per cent, up from 15 per cent this year.

House broker Peel Hunt is impressed by the market share gains and the robustness of margins given the big drop in volume. It expects adjusted EPS to rise to 9¢ in 2024 up from 7.6¢ this year, giving a 2024 price/earnings ratio of 12. Growth is not going to be remarkable as it will be closely tied to wider economic growth, but Coats is well placed in its market and not overly expensive. Stick to buy.

Last IC View: Buy, 79p, 2 Mar 2023