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Headlam reports progress on transformation plan and trading update

Headlam (LSE: HEAD), the UK's leading distributor of floor coverings, has provided an update on the early stages of its transformation plan, announced on 17 September 2024, as well as a trading update for the five months ending 30 November 2024 (the "Period").

In September, Headlam unveiled a two-year transformation plan aimed at streamlining operations and enhancing its customer offering. The plan seeks to boost profitability, increase market share, and release capital through improved working capital management and the sale of surplus properties. Since its announcement, Headlam has made substantial progress.

The consolidation of 32 trading businesses into one unified national entity, operating under the name Mercado, is advancing well. Over 90% of customers (by revenue) have started the process of consolidating their trading accounts, with around 50% of relevant revenue now managed through Mercado. Customers now benefit from a comprehensive product range and more direct interaction with sales teams, resulting in positive feedback and no noticeable disruption to revenue.

The new distribution centre in Rayleigh, Essex, is nearing completion and is expected to start operations in early 2025. This development will make the Ipswich distribution centre redundant. The consolidation of warehouse operations in Scotland has also been completed, merging two sites into a single distribution centre near Glasgow, which has made the Uddingston site surplus to requirements. Discussions are currently underway to sell both the Ipswich and Uddingston properties, with updates to be provided in due course.

A centralised buying and stock control team has been established, allowing for a unified national product file. This change has reduced product duplication, streamlined supplier interactions, and optimised stock ordering. The transformation plan remains on track to achieve the financial benefits outlined in September. Due to continued market challenges, the programme has been extended to secure additional benefits. The aim is to release at least £70m from surplus property sales and net working capital improvements, expected to be realised earlier than initially anticipated, rather than within two years as originally planned. Ongoing profit improvements are now expected to reach at least £20m, with results starting in 2025 and fully realised by the end of 2026.

While lead indicators for the flooring and home improvement sectors suggest potential medium-term improvement, they remain inconsistent. UK consumer confidence declined ahead of the government's budget announcement, leading to a further fall in consumer spending on home improvements. Consequently, the flooring market continued to contract through the second half of 2024, with an estimated year-on-year decline of 10-15%, consistent with H1. Revenue decline has slowed in the second half, with a 7.3% decrease recorded for the five months to 30 November, compared to an 11.8% drop in H1. This improvement was largely due to revenue from larger customers, including the exit of Carpetright from the market, which reduced the UK revenue decline from 11.3% in H1 to 6.6% in the Period.

Despite this slower rate of decline, market conditions have been weaker than expected. The underlying loss before tax for the second half is projected to align with H1. Cash and working capital management remain robust, supported by a strong balance sheet and a property portfolio valued at £142 million. Following the UK Government's budget announcement, the board noted the increase in the national minimum wage and the national insurance rate to 15%, alongside an unexpected reduction in the national insurance threshold. These changes are expected to add approximately £2 million to annual operating costs, effective from April 2025.

Chris Payne, CEO, commented: 'The challenges facing the UK flooring market have continued to impact our short-term trading performance. However, the board is encouraged by the significant progress we are making with our transformation plan, which is essential for long-term success amid current economic uncertainty. The extension of this plan will enable us to achieve greater benefits over the next two years and better position the business for future growth.'

More information:
Headlam
[email protected]
www.headlam.com

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