Shares in IG Design (IGR:AIM) slumped 30% to 306p after the consumer gift packaging company warned full year earnings will be ‘significantly below’ current market expectations as rising costs and supply chain disruption bite.

Ominously, the greetings cards, Christmas crackers and creative play products maker also cautioned cost and supply chain headwinds are likely to continue into the second half of this year and for an ‘as yet unknown period’ in the year to March 2023.

GROWTH CONSTRAINED

IG Design delivered a positive sales performance in the first half to September 2021, with group like-for-like revenues up 11% as it continued to focus on its tried-and-tested strategy of ‘working with the winners’ in retail, among them Target, Amazon and Walmart, while pressing ahead with launching innovative products.

Unfortunately, sales growth was constrained by the supply chain challenges currently being experienced ‘across all distribution and retail sectors’.

And IG Design now expects full year operating margins to be 175-to-225 basis points lower year-on-year after absorbing rising sea freight, raw material and labour costs, meaning this year’s earnings will be ‘significantly below current market expectations’.

CEO Paul Fineman commented: ‘It is more than frustrating to have to report a decline in expected earnings at a time when demand from our customers remains so positive, driven by the continued execution of our strategy and our best ever portfolio of products, brands and service.

‘However, we are not immune to the unprecedented supply chain issues affecting just about every sector, including the significant increase in shipping costs, and despite our best and ongoing efforts to mitigate the impact, these factors have affected our margins.

‘No one knows how long these supply issues will last and we are taking a cautious approach to the near-term outlook, especially in light of the recent increased Covid-19 concerns.’

THE CANACCORD VIEW

Whilst maintaining his ‘buy’ rating on IG Design, Canaccord Genuity’s Mark Photiades slashed his price target from 790p to 620p and downgraded this year’s adjusted pre-tax profit forecast by 61% to $21.4 million.

That implies a massive 42% year-on-year earnings decline, though the analyst believes profits can recover to $32.6 million in 2023.

‘Clearly the impact on full year 2023 remains uncertain but at this stage we conservatively assume a rebound in operating margins of 100 basis points, which is likely to be second half weighted, before a further rebound in full year 2024 to bring margins back to full year 2021 levels’, he explained.

Photiades conceded the news is ‘clearly disappointing in the context of the strong demand that the group continues to see’, but he continues to believe ‘that the medium-term prospects of the group remain positive as it continues to focus on its strategy of “working with the winners”, “design and innovation” and “efficiency and scale”, and that margins will recover and ultimately advance once global supply chains reset.’

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Issue Date: 26 Oct 2021