Shares in Dignity (DTY) were marked down 15.4% to 450p as the funeral services provider warned its new strategy is ‘likely to lead to lower profits’ in the short term as the business sees a full year effect from reduced funeral prices under its new strategy.
Dignity also flagged the risk that the excess death rates seen over the past two years may start to normalise and warned that it will use more cash than it generates while it plays catch-up with investing in the business.
In his outlook statement, CEO Gary Channon explained costs have been rising as Dignity raises the pay of its lowest paid staff.
But the biggest factor affecting the company is likely to be the death rate, since there is ‘a real risk’ that once the pandemic passes, ‘the excess death effect of the past two years starts to reverse itself which it will do at some point.’
PAINFUL PRICE CUTS
A nationwide ‘end of life’ business operating funeral homes and crematoria, Dignity said its new pricing strategy, a response to the entry into the market of cheaper competition, is to offer the best value for money and that lowering prices will reduce how much it earns per funeral and crimp profits as a result.
However, Channon added: ‘Our experience since we changed prices has been that the market share loss stops and then reverses, and so in time we expect that revenue loss to be more than compensated by volume growth, especially when combined with all the other elements of our strategy.’
In its results statement, Dignity also warned cash generation will be impacted by ‘the volatility expected in the mortality rate and the investment needed in executing the strategy’.
This is why the board expects to do some form of transaction to ease the leverage in the capital structure of the company.
Dignity is likely to use more cash than it generates as it invests in its facilities to make up for past under investment and rolls out its new strategy and local branding programmes.
While the business remains cash generative, Dignity hasn’t paid a dividend since June 2019 and doesn’t expect to do so ‘until the business has returned to a more sustainable financial footing’.
MARGIN SQUEEZE
Dignity’s results for the 53 weeks to December 2021 revealed a 12% drop in underlying pre-tax profit to £26.8 million on a 1% decrease in revenue to £312 million despite the elevated death rate, as a combination of rising costs and lower prices impacted margins.
Channon characterised 2021 as ‘a year of great change at Dignity as we set out and started implementing the new strategy which at its core promotes a culture focused on serving families and communities in all their end-of-life needs.
‘There isn’t a part of Dignity that hasn’t been affected by the transformation so far as we inverted the whole organisation, empowered those serving clients and organised ourselves in a more collaborative structure.
‘Although there is still much work to do to complete the restructuring, we know what we need to do.’
