Headlam's volumes slide

Headlam (HEAD) is being hit by an unpleasant cocktail of macroeconomic headwinds. Lower residential consumer spending and fewer housing completions spells bad news for the floorcoverings distributor. This was apparent in the decline in units shifted, with UK volumes 5 per cent lower against last year and rolling volumes sitting a fifth below pre-pandemic levels. It was also evident in the cut to the interim dividend.

Lower volumes hit gross margin, which contracted by 220-basis points to 31.5 per cent. Limited manufacturer-led price rises and a softening of the inflationary environment has meant the margin has returned to pre-2021 levels. 

Given the challenging trading backdrop, it was no surprise that overall revenue growth was muted. UK revenues were up by 3 per cent and European sales fell by the same rate. The weak residential market had a big impact, given Headlam takes two-thirds of its revenues from the residential sector. Overall residential revenues were flat, while commercial sector revenues rose by 7 per cent. 

There were some signs of progress with the growth posted from larger customers and trade counters, with revenues up by 27 per cent and 9 per cent respectively against last year.

Further down the income statement, the slide in profits was impacted by an inflated cost base. Operating costs rose by 6 per cent to £97mn as higher wages and energy bills hurt. But the company managed to put through £4mn of cost savings in the half, including through reducing headcount. 

The shares are valued at 13 times forward earnings, according to consensus forecasts on FactSet, in line with the historic average. Management kept full-year expectations unchanged, but we stay where we are given the uncertain outlook. Hold.

Last IC view: Hold, 317p, 08 Mar 2023