Luceco hit by decline in DIY

Luceco (LUCE) is an electronics manufacturer, making everything from switches and sockets to LED lights, EV chargers and extension cables. These products are essential for residential and commercial buildings and - for a while - this looked set to protect the group from the worst of the economic turmoil. 

However, it is important to remember who Luceco’s end customers are. Of the many distributors it sells to, 35 per cent exclusively serve consumers by supplying online retailers, grocers and DIY shops. In contrast, just a quarter exclusively serve professionals. 

As a result, Luceco has been hit hard by the DIY slowdown. Revenue fell by 10 per cent to £206mn year on year, while its adjusted operating profit tumbled by 44 per cent to £22mn. 

Management was keen to stress that Luceco's trading performance still exceeded pre-pandemic levels, and that 2021 was unusually “buoyant”. Moreover, it blamed many of its problems on its distributor customers, who needed to destock after stocking up on products during lockdown. The group said most of this destocking activity is now complete, and estimated that customers only need to reduce their inventory levels by a further £5mn in 2023 to achieve their targeted inventory cover.

It’s also worth noting that the group generated excellent free cash flow of £30.3mn in 2022. This is because lead times have normalised and Luceco itself has been able to get rid of extra inventory. 

We’re still worried, though. Despite efforts to sell more professionally installed products, Luceco is very exposed to consumer spending, and the cost of living continues to eat into household budgets. A housing downturn isn’t going to do it any favours either. (In total, demand from residential construction and DIY markets slowed by 5.1 per cent in 2022).

Meanwhile, profitability remains under pressure. The group achieved a gross margin of 36 per cent in 2022, compared with 37.5 per cent in 2019, and its operating margin sat at 9.7 per cent, compared with 11.7 per cent in 2019.

Things did improve as the year progressed and the cost of key items like sea freight and commodities retreated. However, a slowdown in sales could put this into reverse. Given that the group is trading on a forward PE ratio of 14.6, compared with a five-year average of 12.8, that’s not a risk we’re willing to take at the moment. Hold.