Studio Retail Group to improve working capital needs due to high stock levels

Online shopping business, Studio Retail Group is exploring ways to improve its working capital needs due to high levels of stock.

In a trading update for the third quarter period, to December 24, 2021, today, the Accrington-based group revealed the widespread supply chain challenges during 2021 not only led to higher shipping costs, but also to late-arriving unsold stock, which will need to be sold throughout 2022.

Consequently, the group has a higher level of stock than normal at this time of the year, which is compounded by the need to acquire current and future season goods earlier than normal, due to nervousness with supply chains.

The group said: “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.”

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

It said it is considering other controllable actions to increase short term liquidity, alongside steps already taken to manage the pace of some of its medium term capital investments. It will raise selling prices during the fourt quarter and into fiscal year 2023 to offset some of the inflationary cost increases.

Today’s update also revealed that the group has lowered expectations for its adjusted pre-tax profits, due to further costs linked to shipping delays and port congestion. It said its current expectations for adjusted PBT for the full year are now likely to be in a range of £28m to £30m.

In its previous update, the interim results announcement last November, the group said it expected full year PBT to be around £35m-£40m compared with the previously stated £42m-£45m.

However, it said trading improved as the third quarter progressed, helped by greater availability of stock in November and December when key shipments were eventually undocked.

Product sales in the eight weeks prior to the interim results, were down 21% against the prior year. But, in the remaining five weeks of the quarter, which included Black Friday, product sales were nine per cent ahead of the previous 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 five per cent.

The comparatives with last year are distorted due high street lockdowns caused by COVID-19. The group said 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 two per cent on last year and up by 23% on two years ago. This is bolstered by the progress the group has made on cash customers and its active credit customer base is up over two years by four per cent at 1.4m, which is a slight decline on last year of five per cent.

Looking ahead, Studio Retail Group said the third national lockdown at the start of 2021 created unusually active and favourable trading conditions during the fourth quarter of last year. It expects to revert to more normal trading conditions in Q4 this year, 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 the higher living costs, notably fuel and energy price increases.

So, the group plans to take a more cautious approach to growth in the coming months to bolster its capabilities and resources for later in 2022.

It revealed that demand in the early weeks of January has been relatively subdued, with some margin erosion as the group cleared some seasonal stock that could not be carried forward.

Chief executive, Paul Kendrick, said: “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 2.3m. We will continue to drive the long term profitability and success of the group.”