With the release of half-year results this morning, the Wickes (LSE:WIX) share price has seen a sharp move lower. It currently trades at 134p, down almost 20% from the previous close. Over a broader one-year period, it’s down 34.5%. Here are a few of the reasons within the poor results that I think are causing the drop.
Revised profit outlook
In the results, the big point was that the company now expects pre-tax profit to be in the £72m-£82m range. This is a revision lower from the £83m previously stated.
Part of this revision is due to the uncertain demand that the company faces from consumers. Wickes is a well-known DIY retailer, and has a large base of clients.
Although I wouldn’t call the products expensive, carrying out new DIY projects in the current economic backdrop isn’t something I would imagine is high up on people’s agendas. The mentality of making-do with what I’ve got it is more in line with my thinking, rather than an urge to redo my bathroom. What this boils down to is that during tough economic times, people are unlikely to want to commit to spending on new projects.
Lower demand ultimately leads to lower profit, which is exactly what Wickes is forecasting could happen.
Cost inflation biting
In the report, it noted that “we continue to manage supply chain inflation responsibly by passing through cash cost increases while maintaining our leading price position.”
Even though this is being contained at the moment, inflation is forecast to rise even higher (into double-digits) at the end of the summer. Therefore, I think investors are concerned about the implications of this for Wickes.
The comment also doesn’t fill me with confidence about how it’s being handled. If it passes cost increases to customers, demand will decrease as goods are more expensive. It can’t maintain the position of being the cheapest if it keeps raising prices.
An alternative is to take the hit on inflation at the business side and not pass it on. Yet this would increase costs and reduce profit margins. Either way, it’s not good.
Limited positives for the Wickes share price
It wasn’t all gloomy reading for shareholders. Total sales were up 0.8% versus the same period last year. On a three-year comparison, sales jumped 23.4%.
The business also spoke of the strong balance sheet and solid order book that it has going into H2. Therefore, even if the outlook isn’t rosy, the company is at least in a good position as it heads into the storm.
Ultimately, the contents of the report have caused a knee-jerk move lower this morning. Even though it contained some good news, I don’t think it’s a company that I want to be investing in at the moment.
