Studio Retail hit hard by shipping issues in festive season, issues profit warning

By

Sandra Halliday

Published
Jan 31, 2022

Value retailer Studio Retail Group’s trading update for the 13 weeks to December 24 (Q3) on Monday included some good news and some bad. On the plus side, it said it saw an improved performance on Black Friday and in the Christmas period, although market-wide shipping issues added “downward pressure" to profit.

Additionally, higher stock levels going into Q4, combined with larger stock commitments than usual, led to the need to increase working capital requirements. It’s “exploring a range of options” to meet this requirement.

CEO Paul Kendrick took a cautiously upbeat stance as he said that “the fundamentals of Studio's business model are solid, notwithstanding the market challenges that have been exacerbated by our over-commitment to stock in the near term. The trading performance over Christmas, with sales up 18% over two years, shows our offer is resonating with a customer base of 2.3 million. We will continue to drive the long-term profitability and success of the group”.

So what actually happened last quarter? Clearly, stock availability was a huge issue, which was tough on the firm as Q3 is its biggest quarter for product sales. The good news was that trading that improved as the period progressed, “helped by greater availability of stock in November and December when key shipments were eventually undocked”.  

But it all meant that product sales in the eight weeks prior to the interim results announcement on November 25 were down 21% against the previous year. In the remaining five weeks of the quarter, which included Black Friday, product sales were 9% ahead, however.  

This brings the performance for Q3 as a whole to 10% below the “exceptionally strong” performance seen during the second national lockdown period last year and cumulatively for the first 39 weeks, it was down 5%.

Of course, comparisons with last year were hard due to the lockdowns back then that artificially boosted Studio’s sales. It said a more appropriate comparison is against two years ago. On this basis, Q3 product sales were up 18%, bringing the total growth against FY20 for the first 39 weeks of the year to a 28% rise.

Again, looking at two years ago rather than one year, the total active customer base figure was better too. It stood at 2.3 million at the end of the latest quarter, which may be down 2% on last year but was up by 23% on 2019.  

And what about the current Q4? The third national lockdown at the start of 2021 “created unusually active and favourable trading conditions for Studio in Q4 last year”. It expects to revert to more normal trading conditions this time round, assuming no further lockdown restrictions. This is also a period where consumers traditionally spend less on discretionary retail, and this is likely to be compounded due to higher inflation.

So it’s taking “a more cautious approach to growth in the coming months to bolster our capabilities and resources for later in 2022, and in line with the broader market”. It’s also increasing selling prices in Q4 and for the new financial year to counter the impact of inflation on its own costs.

It said demand has been “relatively subdued” in January with “some margin erosion as we cleared some seasonal stock that could not be carried forward”.  

This has been partially mitigated through its bad debt performance, “which was better than expected particularly due to improvements in the recovery rates achieved on defaulted debts”. 

It’s also likely that some of the actions to improve short-term working capital will further reduce margin in the remaining weeks of the year, while it has incurred some further costs linked to the shipping delays and port congestion. Its current expectations for adjusted pre-tax profit for the full year are now likely to be in a range of £28 million to £30 million. It had in November predicted £35 million to £40 million, which was also a downgrade from a previous prediction. Adjusted pre-tax profit was £48.8 million in the previous year and £27.3 million two years ago.

It’s also considering “other controllable actions to increase short-term liquidity, alongside steps already taken to manage the pace of some of our medium-term capital investments”.