Howdens' half-year results in late July marked a major milestone for the company the first earnings figures since the group's founder and former CEO Matthew Ingle stood down in April. Under Ingle, the fitted-kitchen firm grew from 14 depots in 1995 to become the UK's biggest supplier, with 688 outlets. There are another 24 in Europe, 20 of them in France.
Investors were glad to see that it's business as usual under new boss Andrew Livingstone. Howdens reported a 12% year-on-year increase in revenue and a 5% rise in profit for the six months to 16 June. With the new CEO promising to "bring even more convenience to the building trade", Howdens' winning formula appears to be in good hands.
Wholesale-only model
Buying a Howdens kitchen is a different experience to going to a showroom. Typically, the customer approaches a local builder. The builder then sends Howdens round to measure up and take the customer through the product range. The builder buys the kitchen from Howdens, adds his mark-up and sells it on to the customer.
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Ingle's big idea was to sell only to builders, a decision requiring the business to make trade-offs. By not selling to the public the company turns away potential customers, but it also has no need for expensive showrooms or advertising campaigns.
Unlike retail customers, who might go decades without a new kitchen, builders come back all the time. They constitute Howdens' retail sales force and it locates depots on industrial estates and other convenient low-rent locations.
Keeping tradespeople happy means higher costs in other areas of the business, though. A missing component can hold up a job, complicating builders' schedules, and upsetting their customers. Still, unlike competitors, Howdens' depots keep the vast majority of items in stock. The company also designs cabinets so they are easy to fit, and provides builders with credit so they can be paid for the job before they pay for the kitchen. Depot managers are encouraged by a generous bonus scheme to get to know their customers and use their discretion in setting discounts. Because Howdens doesn't retail, the discount is confidential which helps ensure the builder can profit from the sale, too.
Highly profitable
The net result of these trade-offs is a unique and highly profitable business. In its last full financial year, Howdens earned a return on capital (a key gauge of profitability)of 23%, slightly above its ten year average of 21%. While fat profits attract competition, emulating Howdens would be very tough for a would-be competitor because the group is so well entrenched in its niche. A new entrant would have to out-compete the incumbent.
Surprisingly perhaps, the shares trade on a relatively modest debt-adjustedprice/earnings ratio of 17. Traders may be worrying about consumer confidence because kitchen refurbishment is pricey, and easily deferred if the economy goes through a sticky patch.
The state of the housing market is a perennial concern, too, because people often change the kitchen when they move house. To my mind, however, a winning formula trumps an uncertain market over the long term.
Racing ahead of its rivals
A friendly builder tells me he buys his kitchens from Howdens because it keeps nearly everything in stock. Very high trade discounts annoy him, because they come across as a sales gimmick, but he appreciates the confidentiality of the discount. He says the sales staff are friendly and on-the ball, always following up inquiries and offering deals. "You tend to stick with who you've got if they look after you," he says.
Research firm JKMR, which specialises in the UK kitchen industry, estimates that Howdens supplies about a fifth of fitted kitchen products by value, and a third of all fitted kitchens by volume.
It's difficult to assess Howdens' share of the small-builder trade market because most other suppliers, such as Travis Perkins, Jewson, Magnet, Wickes and B&Q also retail. Howdens dominates, though. JKMR reckons its sales are roughly equal to all the trade sales of the other outlets combined.
Howdens' popularity with small builders confirms it's a strong business, but it will have to be creative to keep growing. It plans to open about 110 more depots in the UK, implying a total of about 800 in 2022.
Diminishing returns could have set in by then, but expanding overseas is an option. The company says it is looking to open stores in Northern Ireland, and has been active on the continent for more than a decade. It hasn't opened an overseas store for more than two years, however. JKMR thinks Howdens may now target the large number of independent kitchen studios (retailers), or property developers. It may even abandon its trade-only policy, and sell directly to homeowners online.
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