- Full-year operating profit falls from £4.4mn to £1.4mn on 4 per cent lower revenue
- Strong recovery in second half of financial year
- £5.9mn cash generated from operations
- Net debt reduced from £6.2mn to £4.3mn
- Overseas expansion of key brands
Creightons (CRL:30p), a Peterborough-based manufacturer of beauty products, was hit hard by supply chain constraints, higher commodity prices and the spike in energy costs in the first half of the 2022-23 financial year. Indeed, operating profit collapsed from £2.6mn to £0.3mn on flat revenue of £30mn in the six-month trading period.
This prompted the board to put in place remedial measures to restore profitability, reduce costs and inventory levels. Overheads were cut, selling prices to customers raised and manufacturing efficiency improved by moving to a single shift at the group’s Peterborough facility. A focus on raw material sourcing has protected margins to avoid excessive cost increases, too.
The strategy is clearly working. Second-half gross margin of 42.8 per cent was 2.4 percentage points higher than in the first half, returning it to the level reported in the 2022 financial year. It helped Creightons’ second-half operating profit to bounce back to £1.3mn on 3 per cent lower revenue of £28.9mn, albeit the result was below the £1.8mn operating profit reported on £31.5mn of revenue in the prior half-year.
Importantly, working capital management has improved, too. First-half closing net borrowings of £8.3mn have been reduced to £4.3mn, reflecting £4.5mn cash generated from operations in the second half. Closing inventories of £10.2mn was £2.2mn lower than 12 months ago. A focus on cash flow performance and lowering debt will help sustain the recovery in pre-tax profits.
Leveraging branded sales
At the same time, increasing branded sales (39 per cent of the mix) partly mitigated the £5mn full-year revenue decline seen across the group’s private label (38 per cent) and contract manufacturing segments (23 per cent).
Bearing this mind, the directors plan to launch its leading brands, Feather & Down and Emma Hardie, on digital platforms in China and the US. Both brands will be launched on Amazon in North America, a key development ahead of a move into more traditional retail distribution. It highlights the benefits of a vertically integrated business model in leveraging the post-acquisition synergies from the two brands.
In addition, core brands TZone and Balance Active are being distributed in the UK discount and grocery sectors along with international markets. Product launches are playing their part in the recovery, too. For instance, Creightons has launched a range of Vitamin C skincare products that demonstrate enhanced skin brightening and anti-aging performance at an affordable price point.
Discount to book value
It’s reassuring that the board is committed to seeking further cost and overhead savings to restore margin and profitability to previous levels, the effect of which will be to drive a recovery in return on capital employed. The key metric declined from 12.9 to 4.3 per cent in the last financial year.
So, with shares in the £19.5mn market capitalisation company priced 24 per cent below book value of £25.5mn after losing a fifth of their value since the annual results 12 months ago, and the second-half run rate suggesting a recovery in operating profit to £2.5mn could be possible in the new financial year, there is a lowly rated investment opportunity unfolding here. Buy.
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