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Safestyle issues second warning in two months

The window and door specialist has issued another profit warning as market volumes continue to contract
September 11, 2017

A second profit warning in two months. We weren’t kidding when we said things weren’t getting better for window and door specialist Safestyle (SFE). The company said margins, and thus profits, would suffer significantly following a continued deterioration in market conditions. But what does this actually mean?

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FENSA – the government body that tracks the market for the replacement windows, doors, roof windows and roof lights in England and Wales – said unit installations had fallen 18 per cent during the months of July and August. This follows statistics for the five-month period to the end of May 2017, which showed a market decline in volume terms in excess of 10 per cent. Initially, at its first profit warning in July, Safestyle said its order intake had continued to grow around 2 per cent despite the wider market contraction, but in this second warning it appears that has changed. Now, orders are declining beyond the board’s expectations.

This throws up a couple of interesting points. At first, this seemed to be a volume issue rather than a value issue: if market volumes were falling but Safestyle’s orders were growing, that suggests its inflation-driven price increases weren’t totally deterring customers. What’s more, the availability of credit plans meant Safestyle’s customers could still stomach the instalment payments calculated by third-party financiers. So what’s changed? Perhaps those price increases are beginning to bite as household budgets start to feel the squeeze between inflation and wage stagnation. Or maybe consumers are less likely to take on debt for discretionary items, preferring to delve into more long term and perhaps, life-changing products such as mortgages while rates are low. The probability is that both of these things are true. In order to drum up new customer leads, Safestyle has also ploughed money into marketing – not to mention paying subsidies to its credit-providing financiers – meaning margins are bearing the full brunt of this slowdown.

What does this say about the wider RMI market? According to Matthew McEachran, an analyst at N+1 Singer, this end of the housing market should be in what the industry calls “second phase replacement”. That’s a good place to be: it means people who bought homes 20 or so years ago should be contemplating home improvements and explains why the Construction Products Association (CPA) and the Office for National Statistics (ONS) expected the private RMI market to grow in 2017. It’s what makes Safestyle’s performance “even more shocking” in Mr McEachran’s words.

But analysts at Peel Hunt argue that growth in new construction has been stronger than RMI since 2013 and this trend is expected to continue over the next couple of years, while Mr McEachran argues that RMI is driven by one, rather unquantifiable variable – consumer confidence. This, says Mr McEachran, has “taken a beating” in 2017.

It’s likely that there’s further pain to come: “We’re reaching the peak of price increases,” says Mr McEachran, thus making it an unsustainable strategy for much longer. The likes of Howden Joinery (HWDN) could fall victim to this. The construction company doesn’t deal with consumers directly, making most of its sales via the building industry, but it is caught up in the credit cycle. It’s also had multiple price increases in the last year or so, something that could mean the wheels come off sooner rather than later. Other casualties could include Topps Tiles (TPT) and Carpetright (CPR) – although it’s arguable that the degree to which management-driven self-help strategies are paying off differ from company to company.

Arguably, one clear casualty has already emerged in the form of sofa seller DFS (DFS). The company is due to report results in early October, although the numbers were largely revealed in a surprise profit warning in June. At that time company bosses said the pressure of declining footfall trends, a rising cost base and a dwindling level of consumer spending meant cash profit would fall in the region of £82m to £87m. It too reaps a chunk of sales via credit arrangements, suggesting this is a common thread to the recent spate of warnings from the British retail sector.