- Discount book and toy seller has restored profitability and dividends
- Encourages with news of strong recent trading
- Retailer remains cautious over consumer outlook
Shares in The Works (WRKS) jumped more than 50% to 44p after the cut-price book, toy and arts and crafts retailer reported solid annual results showing good growth in sales and profits ahead of pre-Covid levels in the face of falling consumer confidence and cost headwinds.
Following a damaging (8 August) profit warning last month, there was relief as the firm said it was ‘encouraged by the strength of recent trading’ and reiterated guidance, albeit recently downgraded, for full year 2023.
TRADING UPTICK PERSISTS
Results for the year to 1 May 2022 were robust considering the swirling headwinds facing the retail sector.
Birmingham-headquartered The Works swung from losses of £2.8 million to pre-tax profits of £10.2 million on total revenue up 46.5% to £264.6 million and also returned to the dividend list after a two-year hiatus by proposing a final distribution of 2.4p.
However, all eyes were on the outlook in which The Works said the more positive pattern of trading that had developed by the end of its first quarter had continued over the ensuing 7 weeks to 18 September ‘with our refreshed outdoor play range performing well, a very good “Back to School” season and a gradual improvement in our online performance’.
Over the seven weeks, The Works physical store like-for-likes rose 7.9%, and while online sales were down by 10.1% they were still 40% higher than pre-Covid levels, resulting in a total like-for-like sales increase of 5.7%.
‘We are encouraged by the strength of recent trading which reinforces our confidence in the resilience of the business and that the ongoing improvements we are making to our proposition are resonating well with customers,’ insisted The Works, confident it can deliver growth in the medium term.
Despite positive recent trading, the company remains ‘cautious with regard to how consumer spending might be affected during the remainder of this financial year, by factors such as higher inflation’ and therefore management has left guidance for full year 2023 FY23 unchanged.
The company-compiled consensus points to a drop in adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) from £16.6 million to roughly £9 million.
PLEASED BY ONLINE PICK-UP
‘Since our last update in August, our online performance has gradually improved and we continue to be encouraged by store sales, which comprise the significant majority of our revenue and have delivered positive like-for-like sales growth since June,’ enthused chief executive Gavin Peck.
‘The Works is a resilient business with a proven track record of delivering robust results during times of economic hardship, however, given current conditions, we maintain our cautious view of the year ahead.’
THE EXPERT’S VIEW
Russ Mould, investment director at AJ Bell, said The Works’ value proposition is resonating with cash-strapped consumers who are ‘watching their pennies but still want to buy things like birthday presents and the odd affordable treat’.
Mould also noted that The Works ‘does well with “Back to School” items and has historically been one of the go-to places to buy the latest playground craze, such as fidget spinners and slime in the past.
‘The important thing to consider is that consumers are not going to stop spending altogether. They’re going to be more selective with their purchases, and that means potentially choosing lower-priced retailers. Theoretically this benefits The Works, but there is no guarantee it will stay on top.
‘One could easily argue that a lot the stuff it sells - such as painting canvases, biographies of C-list celebrities and jigsaw puzzles - aren’t must-have items. Therefore, if times become a lot tougher, even The Works could be susceptible to a sharp decline in sales.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Ian Conway) own shares in AJ Bell.
