Wickes hit by inflationary effects

For Wickes (WIX), results for 2022 were always likely to be fragmentary in a year characterised by steepening inflation and a strong central bank response. Even though we may be approaching the apex of the current interest rate cycle, it pays to determine which parts of the product offering are impacted by a fall in discretionary household budgets. Lest we forget, UK inflation remains in double digits.

Management indicates that trading has been mixed in the early part of 2023, with core sales “moderately behind the same period last year”, while trade volumes give cause for optimism. Indeed, the digital TradePro membership growth rate and associated sales both increased by just under a fifth, with new customer numbers for the former up by 112,000, taking the total to 746,000. Do-it-yourself volumes have continued to “normalise”, helped along by click & collect and Klarna payment options, while sales are recovering strongly at the do-it-for-me (DIFM) segment, an end-to-end service on items such as kitchens and bathrooms that suffered due to pandemic disruption.

Inflation not only eats into discretionary (non-essential) home improvement budgets, but it also weighs on margins. So, despite further market share gains in the core segment, and over £20mn in productivity and efficiency gains, the group’s adjusted operating margin contracted by 90 basis points to 6.7 per cent.

Management said that, although some DIY activities were brought forward during early phases of the pandemic, some larger projects linked to trade and DIFM channels may have been deferred. Ultimately, however, the appetite for home improvements will be suppressed by inflationary effects, which will also eat into margins. Wickes’ hefty leasehold obligation also stands as a bear point, although, on balance, we think that a forward rating of six times consensus earnings and a prospective yield of 5.8 per cent mean the medium-term risks to profitability are overstated. Buy.

Last IC view: Buy, 123p, 16 Sep 2022