Howden Joinery: As simple as rolling out new depots

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Kitchen supplier Howden Joinery tries to do one thing very well. It’s succeeding.

In full-year results for the year to December 2015, Howden Joinery increased revenue 12% to 1.2bn. Adjusted profit rose 14%. The company had a large cash pile and no debt at the year end, having earned high returns on capital of 26%. Profitability has been building since Howdens was liberated from MFI, the furniture store chain, in 2006.

While remaining committed to being debt free and paying £35m a year into its underfunded defined benefit pension fund*, it’s raised the dividend substantially and is planning to buy back £55m worth of its shares, having already bought back or committed to buy back £70m**.

By just about every measure Howdens is performing like a company doing everything right.

On a same depot basis, Howdens increased revenue by 9.2%, due, the company says to the strength of its business model. That boils down to meeting the needs of small builders, 450,000 of them, better than any other company.

Howdens finances its customers, giving them generous enough credit terms to fit a kitchen and receive payment before paying for it. The company gives small builders a confidential discount to allow them to profit and to prevent installation delays it keeps the entire range in stock, thanks in part to lean manufacturing techniques. Howdens designs the kitchens, and can accommodate changes in specification right up to the point of delivery. It’s expert staff are motivated by a share in the profit of their local depots, which are located on trading estates where rents are low.

This strategy, says founder and chief executive Matthew Ingle has allowed the company to open new depots and increase turnover continuously except in 2009. It opened 30 new depots in the UK in 2015 and believes there is scope for 180 more, bringing the total to 800. At the current rate that is six more years of expansion, after which it may well turn to Europe where trial depots in France, Belgium and Holland are enabling Howdens to learn about other markets. It’s planning a depot in Germany. As Howden grows, it gains economies of scale in sourcing and manufacturing.

To support the growing number of depots, Howdens is is replacing aging production lines, developing a new production facility, and leasing a new warehouse.

A share price of 469p values the enterprise at £3bn or about 17 times adjusted profit. The earnings yield is 6%.

Howdens says it sells more kitchens than any other company in the UK and as it grows, it’s becoming more profitable. While Howdens’ financial performance would come under pressure during a recession, when fewer people are buying houses or can afford new kitchens, and we don’t know how successful Howdens will be in Europe, Howdens is a successful company that is at least capable of maintaining, if not extending, its lead at home.

It would probably make a good long-term investment.


*All other things being equal the payments would wipe out the deficit by 2017, when the commitment ends.

**I have mixed feelings about the buyback. Buybacks return cash to investors obliquely, by reducing the number of shares in issue and thereby increasing the proportional interest of shareholders in the company. In theory, their shareholding becomes more valuable, and other things being equal the price of the shares should rise. But Howden hasn’t cancelled the first £45m of shares it bought back, it’s holding them in Treasury, and will use them to satisfy share schemes, which means the reduction in shares is only temporary and they will be reissued to pay management. While rewarding management is a necessary expense, this is not a transparent method of remuneration, and describing the buybacks that enable it as a return of cash to shareholders gilds the transaction somewhat.

Comments

This share has been on my watch list for 4 years ( and yes, I wish I had got in then!). I am still tempted but over exposure in this area of the market stops me for now. As for re investment in manufacturing, there is still scope to branch in to, as yet untapped by Howdens, markets within the joinery sector in the u.k. which, tightening building regulations are creating in the window/ external door sector... Interesting as a lot of the traditional small joinery shops find it difficult to make a product that can conform to C.E regulations, Building regulations on energy performance, Building regulations on strength and security and still produce a product that is different enough to gain a market advantage.
The market is ripe for a lean manufacturer with a short lead time to produce windows/ external door sets to given sizes. I would not be surprised at all if Howdens are not exploring this.

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