This manufacturer's makeover could lead to a rerating

Creightons (CRL:23p), a Peterborough-based manufacturer of beauty products, has successfully implemented remedial measures to restore profitability, reduce costs and inventory levels.

In the six-month trading period, overheads were reduced by £0.5mn to £9.3mn. This was achieved by moving production to a single shift at both the Peterborough and Devon factories, which saved £0.2mn on energy costs, and slicing £0.3mn off headcount costs. Importantly, the reduction in labour has not impacted the ability of the business to meet customer demand. Moreover, by bringing picking and packing of finished goods in house the company has saved £0.2mn on logistics and warehouse activities.

A focus on raw material sourcing has protected margins to avoid excessive cost increases while sales teams have successfully been negotiating higher prices with customers to restore profitability. It’s clearly working, as highlighted by the 1.8 percentage point increase in gross margin to 42.2 per cent, in line with historic levels, and 80 per cent higher first-half underlying operating profit of £0.5mn. Adjust for one-off items that impacted profit in the first half of last year, and underlying pre-tax profit trebled to £0.3mn on 7 per cent lower revenue of £27.6mn.

The balance sheet is looking in better shape, too. Net debt has been slashed by a third to £6mn, including £1.2mn of IFRS 16 lease liabilities. Tighter working capital management means that the business has been able to reduce stock levels by almost a fifth to £10.4mn, and without impacting service levels.

Branded and private-label sales holding up

Although sales were lower year on year, this was down to a £2.9mn sales decline in the contract sales segment due to brands being overstocked so they required less manufacturing in the period. By contrast, Creightons private label sales (45 per cent of the sales mix) increased by 9.8 per cent to £12.2mn and branded sales held steady at £11.6mn at the gross sales level (before retailer promotions and support). Importantly, both categories “continue to gain momentum”.

Expanding brands into overseas markets remains a strategic focus. For instance, the Emma Hardie skincare brand has now been launched on several digital platforms in China, and Feather & Down, a successful UK sleep brand, is launching on Amazon in both North America and Germany. It is a key stepping stone ahead of securing listings with mainstream retail distribution.

Admittedly, news that the employment of former managing director Bernard Johnson was “terminated” the week before the interim results release is an unwanted distraction. However, the recruitment process for a replacement is well under way and the company clearly has recovery potential.  

Although Creightons lacks broker coverage, the directors highlight that the “margin recovery and proactive cost reduction measures will continue to deliver an improved performance in the second half of the year”. In the second half of the 2022-23 financial year, Creightons reported underlying pre-tax profit of £1.06mn on revenue of £29mn. That’s the marker to beat, and one that suggests potential for the £15.7mn market capitalisation company to deliver full-year pre-tax profit of £1.4mn. If that can be achieved, the shares should re-rate. Hold.

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