Studio shares fall 35% on working capital, profit news

Shares of Accrington-based home shopping firm Studio Retail Group plc (SRG) — formerly known as Findel — fell about 35% on Monday after it warned it is “exploring a range of options to meet a short-term working capital funding requirement” and downgraded its profit expectations for the second time in two months.

Studio Retail Group said higher stock levels going into the fourth quarter, combined with larger stock commitments than usual, led to the need to increase working capital requirements.

The industrywide (and acknowledged) supply-chain challenges in calendar 2021 have not only caused higher shipping costs for Studio, but have also led to late-arriving unsold stock of continuity ranges, which will be sold throughout calendar 2022,” said Studio Retail group.

“This has led to a higher level of inventory than normal at this time of the year. 

“This is further compounded by commitments to current and future season stock needing to be made earlier than normal due to ongoing nervousness in supply chains. 

“In January, we have identified that these higher levels of good-quality stock, in a market where demand is anticipated to soften, is at a level that creates a surplus stockholding position whilst we sell through the ranges to our customers. 

“We are exploring a range of options to meet the resultant working capital funding requirement, including discussing the current level of our working capital facilities with our long-standing UK lenders.

“Studio currently has a fully drawn revolving credit facility of £50m and, with a 12-month EBITDA of c.£50m, is well within its key gearing covenant of 1.75x.

“In addition, we are 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.

“We anticipate that the disruption to supply chains will continue throughout calendar 2022, and other inflationary pressures require us to take a more stringent approach to operating costs in FY23 to ensure we can continue to maintain great value products to our customers, and further reduce working capital requirements.”

In an update on its trading during its peak Q3 trading period — the 13 weeks to December 24, 2021 — Studio said: “Product sales in the eight weeks prior to the interim results announcement on 25th November 2021 were down 21% against the prior year. 

“However, in the remaining five weeks of the quarter, which included Black Friday, product sales were 9% ahead of the prior year. 

“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, down by 5%.

“The comparatives with last year are distorted due high street lockdowns consequent to Covid-19. 

“A more appropriate comparison is against the performance 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 +28%.

“The total active customer base stands at 2.3m, which is down 2% on last year and up by 23% on two years ago. 

“This is bolstered by the progress we have made on cash customers and our active credit customer base is up over two years by 4% at 1.4m, which is a slight decline on last year of 5%.”

In its outlook, Studio said: “Demand in the early weeks of January has been relatively subdued, with some margin erosion as we cleared some seasonal stock that could not be carried forward. 

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

“It is also likely that some of the actions to improve short-term working capital discussed below will further reduce margin in the remaining weeks of the year. 

“We have also incurred some further costs linked to the shipping delays and port congestion.

“As a result, our current expectations for Adjusted PBT (adjusted profit before tax) for the full year are now likely to be in a range of £28m to £30m.”