Has Tandem turned the corner?

Birmingham-based Tandem (TND:200p), a designer, developer, distributor and retailer of sports, leisure and mobility equipment, reduced guidance multiple times last year, culminating in a profit warning in mid-December that flagged up the annual loss.

The weaker performance was largely due to lower revenue in the group’s toys, sports and leisure division, the group’s largest source of income, which declined by a third to £10.1mn. Consumer buying behaviour was negatively impacted by higher interest rates and the cost of living crisis, but the sales decline was also accentuated by national retailers transitioning from free-on-board (FOB) purchases to direct delivery (DD) to minimise the amount of stock they hold. Pressures on consumer budgets and last year’s unseasonal Spring wet weather subdued demand in the smaller home and garden division, too, which reported 27 per cent lower revenue of £2.4mn.

Tandem could be turning the corner

However, there are positives. Buoyed by the sale of electric bikes and electric golf trolleys, the e-mobility segment increased revenue 44 per cent to £5.5mn, or a quarter of the group total. The momentum has been maintained into the new financial year. In fact, demand for electric bikes has risen 65 per cent in the first 12 weeks of 2024, reflecting an ongoing shift in consumer preference towards sustainable and alternative modes of transport.

Adopting an integrated approach through Tandem’s Electric Life Shop and website is facilitating greater accessibility and convenience for customers and accelerating sales, one reason why Tandem’s bike sales (including mechanical) increased 17 per cent in the 12-month period, massively outperforming the UK cycling market, which suffered a 6 per cent sales decline to a 40-year low. To capitalise on the opportunity, Tandem is launching a raft of new branded electric bike products. Lightweight children’s bike brand Squish is in strong demand, too, and Tandem plans to launch 15 new children’s bikes to ride off this positive trend. Also, analysts at market research group Mintel forecast that UK bicycle sales volumes could bounce 12 per cent in 2024 from depressed levels.

Importantly, with inflationary pressures subsiding and interest rate cuts on the horizon, the multiple headwinds faced by consumers last year are set to ease and increase disposable incomes. That should be positive for the group’s toy division, which has recently onboarded three national retailers to increase its distribution network and expanded the licensed toy range, along with Rollacases tailored for children, and a new scooter brand, ‘Squishles’.

It’s early days, but house broker Cavendish expects Tandem to return to profit this year, forecasting pre-tax profit of £0.5mn on 19 per cent higher revenue of £26.5mn. True, the dividend has been axed for the time being, and a prospective price/earnings (PE) ratio of 28 is high, but a 54 per cent discount to book value highlights the value embedded in the company and the recovery potential once trading conditions normalise. Prior to the Covid-19 pandemic the business was making post-tax profit of £2mn, or five times this year's forecast.

So, having last rated the shares a hold, at 166p (‘Profit warning hits Tandem’s shares’, 21 September 2023), I maintain that advice. Hold.

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