Profit warning hits Tandem’s shares

Birmingham-based Tandem (TND:166p), a designer, developer, distributor and retailer of sports, leisure and mobility equipment, has reduced full-year revenue guidance and now expects to merely break even in 2023.

The news prompted analyst Peter Renton at house broker Cavendish to reduce his current-year revenue forecast by 12 per cent from £30mn to £26.3mn. The operational leverage of the business means the decline in sales has a far greater impact on profits, hence why Renton only expects a small annual pre-tax profit of £0.1mn. That is massively below his previous estimate of £1.2mn. The brokerage also cut 2024 revenue estimates by 12 per cent to £29mn, which leads to a 45 per cent reduction in pre-tax profit forecasts and earnings per share (EPS) to £0.9mn and 12.7p, respectively.

The first-half revenue decline was in line with the trading up in late June (‘A drop in sales won't affect this retailer's profits,’ 28 June 2023), but since then the combination of unseasonally wet summer weather and ongoing weak consumer demand has impacted key product categories (outdoor toys, garden products and bicycles).

In the first half, toy sales slumped 44 per cent year on year, home and garden sales declined 27 per cent and mechanical bike demand is now at a 20-year low. A shift in buying habits has accentuated the sales decline as national retailers transition from free-on-board (FOB) purchases to direct delivery (DD) to minimise the amount of stock they hold. This has aligned Tandem’s sales more closely with the end customers’ buying behaviour, and the group is well placed to handle the shift, having invested in a new purpose-built warehouse to consolidate operations, so reducing reliance on third-parties and enabling cross-selling of goods into single shipments.

Bright spots

Despite the downgrades, there are several positives for shareholders. Electric bike sales have surged more than 150 per cent year on year, lifting revenue in the emobility segment 53 per cent higher than the same period in 2022. The introduction of market-leading ebike brands (Orbea, Whyte, Quella and Pure) is driving sales above budget both online and through Tandem’s own retail outlet. Lightweight children’s bike brand Squish continues to trade ahead of last year, and the bike range could get a boost from new product releases in the fourth quarter. The group has also added 81 independent dealer accounts to increase its distribution network.

In the home and garden division, Tandem is releasing “new exciting products ahead of Christmas and winter, and anticipates high demand”. Website conversion rates are improving, too.

Debt refinancing to unwind distress risk

Tandem had net debt of £3.1mn on 30 June 2023, made up of secured mortgage loans of £5.1mn and gross cash balances of £2mn. Reflecting tighter working capital management, in particular a lower level of inventories as national retailers change their buying behaviour, Cavendish reduced its year-end net debt estimate from £3.4mn to £2.8mn.

The loans mature at various dates between April 2024 and January 2025, and the directors are in constructive talks with their lender to secure a refinancing into a single term loan on terms attractive to the board. However, both the directors and the lender have now become aware of a technical breach of the existing loans, which first came about when the majority of the loan was drawn down in 2022. Tandem has the ongoing support of its lender, so a refinancing should materialise in due course.

Not surprisingly, some shareholders headed for the exit on news of the breach of a banking covenant, profit downgrade and passing of the interim dividend – Cavendish downgraded its full-year dividend per share estimate from 10p to 3p for both 2023 and 2024. The shares lost a fifth of their value after the results, and now trade on a hefty 64 per cent discount to net asset value of 457p even though freehold property accounts for 252p of book value. Effectively, the equity in the freehold property assets backs up all Tandem’s market capitalisation, so no value is being attributed to the operating business.

I would certainly not be selling out at a three-year share price low as a successful debt refinancing and reduction in second-half borrowings would unwind some of the distress risk embedded in the depressed share price. Moreover, the easing of inflationary pressures on household budgets coupled with recent welcome relief in the fixed-rate remortgage market should support an improvement in trading next year. On a forward price/earnings (PE) ratio of 13 for 2024, the shares rate a hold.