Bullwhip cracks at James Halstead

The oft-discussed bullwhip effect, which has led to comapnies building large stocks of inventory to cope with supply chain stresses only to then be hit by weaker demand, is in evidence at floorcovering manufacturer James Halstead (JHD).

The company’s inventory stood at £112mn at the year end, an 85 per cent increase on the prior year. This had a knock-on effect on its net cash, which, at £52.1mn (excluding leases) reduced by £31.2mn during the year.

Operating profit was largely flat despite increased sales as it had to contend with higher fuel and energy costs. Chief executive Mark Halstead described a decline in its trading margin as “acceptable, given the flood of cost increases that we have in part passed on” but he warned that the autumn and winter could bring deeper problems.

Overcapacity in the sector has already seen one competitor fall into receivership, and Halstead said that the company might have to temporarily suspend some production to bring stock back to normal levels. The company also said it wouldn't lift its final dividend as it focuses on cash resources.

Sales have been maintained since its year end, though, and it has passed on most price increases. While the company will suffer some higher costs due to sterling’s fall against the dollar, the fact that it exports heavily "will have some positives", Halstead said.

Analyst Panmure Gordon maintained its buy recommendation on the stock, nudging up its earnings forecast for the current year to 9.8p a share. The shares trade at 21 times this level even after a 29 per cent year-to-date decline. 

The company is a well-respected operator, but with the outlook darkening – the latest Purchasing Managers' Index data shows manufacturers’ orders are in decline, with customers either postponing or cancelling purchases – we stick with our hold recommendation.

Last IC View: Hold, 232p, 31 Mar 2022