Uncertain macro environment continues to disrupt Italtile’s profitability

JSE-listed manufacturer and retailer of home-finishing products Italtile says ongoing global supply chain disruptions, significant increases in inflation, and load shedding negatively impacted the group’s operations and profitability for the year ended on 30 June.

CEO Lance Foxcroft says consumer confidence also continued to decline in local markets, as a result of widespread despondency sparked by decaying political, social, and economic conditions.

“Several successive interest rate increases and accelerating inflationary pressure on building costs subdued investment sentiment further and reduced affordability, influencing cost-conscious homeowners to defer or scale down on renovation and building projects.

“Disruption and higher costs caused by increased load shedding up to Stage 6, despite mitigating measures implemented by the group, negatively affected operations and profitability.”

Foxcroft noted on Thursday that the shift in consumer spend away from home improvements to other recreational and discretionary purchases continued as Covid-related restrictions were eased and various sectors of the economy reopened.

Analyst more upbeat

Independent analyst at Small Talk Daily Anthony Clark says the underlying results for the year exceeded his expectations and have shown the group’s resilience.

“If you want to be in home refurbishment, DIY and building materials, the place to really stay is Italtile because quite frankly, its long-time track record has been absolutely astonishingly good,” says Clark.

The group reported a 9% increase in headline earnings per share to 152.1 cents, which is at the upper end of the trading update it published two weeks ago that predicted an increase of between 7.5% and 9.7%.

Read: Italtile forecasts higher FY earnings

Revenue from group-owned stores and entities declined by 1.7% to R9 billion in comparison with R9.1 billion in 2021.

“The real key to this business despite revenue being down is that they managed to increase the gross profit margin to 45.8% from 44.1%,” says Clark.

“It’s a 1.7% rise in a very difficult environment which shows the tight control of costs that this company has and, more importantly, its ability via its vertically operated chain to trap margin along the way.”

Italtile reported a marginal decline in consolidated turnover to R11.3 billion from R11.6 billion in 2021, underpinned by pandemic-related stay-at-home restrictions.

Read: Home improvements boon evident in the figures [May 2021]

It says lower sales volumes, which reflected softer market demand during the period, were offset by average selling price inflation of 8%.

However, its trading profit grew by 6% to R2.7 billion.

CTM, one of the group’s major brands, saw a 4.2% rise in underlying profitability.

Home improvements on the up again?

Clark says the growth confirms that a constrained market – facing high fuel costs and rising interest rates affecting bond and car payments – is starting to return to making investments in home refurbishment and DIY.

“The mid-to-upper end segment was up 17.8%, which again ties in with the resilience of the more affluent in this country who perhaps haven’t travelled and spent as much money for the last couple of years and have been happily extending and upgrading their homes,” he adds.

Clark says interesting to note is the 13.4% growth in the supply chain business, which is one of the key factors the group has focused on for the last two to three years.

“The significant proportion of Italtile’s products are sourced in southern Africa which means it doesn’t have the same constraints that many other importers have of a volatile rand, souring international container shipping costs and long lead times.

“Because it procures a significant proportion of its needs domestically, it can get the product to the shelf much faster, cheaper and better than many of its competitors. And that has been its winning trump card for the last few years.”

Although the ceramics business was down by 2.5%, Clark says the decline was well controlled and commendable given that the company would have still been hit by high fuel costs and underlying expenses tied to manufacturing tiles.

He says Italtile’s share price has remained flat year to date and leaves the company in a good position – specifically when compared with its immediate competitor Cashbuild, which recently published a profit warning on Sens.

The share closed at R15.54 on Thursday.

“The very fact that Italtile can show a very modest decline in revenue and still expand its growth profit margin and show a record trading profit is commendable in an extremely difficult and challenging environment,” Clark adds.

Foxcroft says the group will continue to focus on the growth levers within its control and influence. “We will place an untiring focus on exceptional product ranges and retail excellence disciplines, underpinned by improved outcomes-based training and development of our people.”

 Nondumiso Lehutso is a Moneyweb intern.

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