I think that it’s fair to say Safestyle UK hasn’t had the best trading year. They have had to publish a series of disappointing trading updates throughout 2017 which has sent their share price tumbling from highs seen in April.

Their troubled trading has also had a negative impact on suppliers to the companies. Markets never like bad news, but as with many other industries where other companies are exposed to the one suffering, when a key business delivers that bad news, the companies connected to it tend to get it too.

This was the case earlier on today. Safestyle published a negative end of year trading update and the likes of Epwin and Eurocell took a hit too. Not as much as Safestyle, but a slide downwards nonetheless.

A difficult 2018 ahead?

For those that haven’t read the publicly available trading update, these were the words that did the damage today:

In our interim results announcement on 21 September 2017 we signalled a continuing deterioration in the market resulting from declining customer confidence and that accordingly our forward outlook was cautious. Since then demand has weakened further, and in the three months to 30 November 2017 the Group’s sales have been 0.3% lower by value, and 6.8% lower by volume, than the corresponding period in 2016. Whilst we believe we will have made significant market share gains in 2017, for the 11 month period to 30 November 2017 the Group’s sales by value are 0.8% lower than for the same period in 2016. 

With sales in the short month of December not helped by severe weather disruption to the planned installation programme, it is clear that Q4 sales will now be below our already reduced expectations. At the same time, those sales have come at an increased cost of acquisition, due to higher lead generation expense in a competitive landscape and a higher proportion being made on extended finance terms, negatively impacting margins. As a consequence, our 2017 full year out-turn (namely underlying profit before tax, before exceptional restructuring costs and share based payment charges) is now expected to be below current market expectations, at a level of least £15 million.

The Group continues to be highly cash generative and expects to have a strong cash balance of approximately £12 million at the year end and a robust balance sheet. During the year we completed a major capital investment programme, which leaves the business very well invested for future trading and any upturn in demand. Furthermore, we remain fully committed to our progressive ordinary dividend policy.

We are actively reviewing all of our costs and seeking operational efficiencies where we can, and have already implemented substantial savings across the business, including a major restructuring of our Sales and Canvass function. At the same time we are investing in technology and other developments to enhance operational efficiency and improve the customer experience.

Looking ahead, we expect market conditions to continue to be very challenging in 2018 and, although we aim to further consolidate our position of market leadership, the Board has lowered its expectations of the Group’s performance in FY2018. The benefits of our cost saving and efficiency programme will fall mainly in 2018 and as such should help mitigate the impact on profitability of any further fall in market demand. We, therefore, expect only modest growth in earnings over 2017.

This latest update caused this to happen to the share price on Wednesday:

Credit: Bloomberg

At one point during the day the share price was only a few points away from historical lows. The price has already dropped to less than half of the yearly highs which were reached only in April of this year. As a result, investors started to unload their risk in the stock.

The trading update also provided some clues as to the state of things. It mentioned that in the last three months to November 30 sales in volume were lower by 6.8% in comparison to the same period last year. Why is this important? These three months are the silly season. That time of year where home owners rush to get their home improvement works done before the end of the year. The fact that volume has dropped by nearly 7% during this period should be of concern.

The weather gets the blame for December, even though we’re only halfway through. When they say they are seeking operational efficiencies and reviewing costs, that unfortunately may mean job losses. And when they say they expect 2018 to remain challenging, that is diplomatic business-speak for things are probably going to be rough. Also, they say that they have a £12m cash balance. But, given the size of the company and their market cap, does this sound enough? How long will £12m last if sales continue to fall?

I don’t however believe this to be a solely Safestyle story. This is a symptom of what is happening to the wider window and door industry.

DGB Features

Changing habits

The buying public has changed. They’re educated, armed with information on a plethora of products now available from the window and door industry. They know shiny White PVCu is a product of that past, and they know when they spot a phoney sale or hard-sell tactic. This is where smaller installers, the locals and regionals, are able to steal market share away from the national installers who may still be seen as a pillar of the past.

With window and door products quickly moving into the realm of higher end luxury purchases, home owners are becoming far more savvy and seeking out more localised, specialised installers that can provide them with a variety of options and a buying experience that equals that. This is fast becoming the preferred method of purchase by home owners, which means it’s bad news for the stereotypical companies out there who refuse to change with the times.

I question how easy it will be for the biggest installers out there to make any meaningful changes to how they operate their companies. Ethos, attitude and habits at the largest companies are often very hard to shift, and the major damage is done long before they realise it.

As for 2018, even though there will remain bumps in the road, I think it will be a good year to be a smaller installer or fabricator. The move towards the higher end will be carried by these companies and understand better how home owners have evolved in buying habits. The companies who manage to really capture key niches in their local areas could cash in big time.

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