Marks Electrical Group plc

Results for the six months ended 30 September 2023

Continued trading momentum driven by premium next-day service offerings

Marks Electrical Group plc ("Marks Electrical" or "the Group"), a fast growing online electrical retailer, today announces its unaudited results for the six months ended 30 September 2023 ("the Period" or "H1-24" or "first half").

Financial highlights

·      Strong first half trading period with revenue growth of 24.8% to £53.9m (H1-23 £43.1m)

·      Adjusted EBITDA⁽¹⁾ of £2.3m (H1-23 £2.7m), with the strategic decision to introduce our own installation service, combined with inflationary pressures in distribution costs impacting H1 margins, but expect this pressure to ease over H2 as we benefit from improved operating leverage during the seasonal peak trading period

·      Continued focus on working capital management, reducing inventory days from 82 in H1-23 to 64 in H1-24 and driving a strong operating cash conversion of 145% (H1-23 189%)

·      Free cash flow of £1.7m (H1-23 £4.5m), with £1.4m invested in our vehicle fleet and distribution centre

·      Adjusted EPS of 1.11p (H1-23 1.66p)⁽³⁾, Statutory EPS of 0.83p (H1-23 1.66p)

·      Robust, debt-free balance sheet with closing net cash position of £10.9m (H1-23 £7.7m), supporting an interim dividend maintained at 0.30p per share (H1-23 0.30p), to be be paid on 22 December 2023 to shareholders who are on the register at the close of business on 1 December 2023, and shares will be marked ex-dividend on 30 November 2023

Operational highlights

·      Growth in Major Domestic Appliances ("MDA") market share from 2.4% in H1-23 to 2.9% in H1-24, with our share in the online segment of the market growing from 4.5% to 5.4%⁽⁴⁾

·      Growth in Consumer Electronics ("CE") market share from 0.3% in H1-23 to 0.5% in H1-24, with our share in the online segment of the market growing from 0.6% to 0.9%⁽⁴⁾

·      Strong performance driven across all major product categories with particularly high growth in televisions (+71%), washer-dryers (+74%) and American fridge-freezers (+36%)

·      Developed the Marks Electrical Academy, a purpose-built training facility, where our drivers and installers are trained on integrated, gas, electrical and freestanding connections and appliance installations

·      Rapid growth in our premium service offerings with the attachment rate for installation and connection services having improved from 9% of all orders in H1-23 to over 15% in H1-24

·      Began the implementation of a new ERP system expected to complete in FY25

·      Proudly maintained our industry leading Trustpilot score of 4.8, reaching over 55,000 reviews with 95% of those reviews being 4 and 5 star, demonstrating the strength of our best-in-class customer proposition

Outlook

·      Continued double-digit revenue growth in October and a strong start to November leaves us well positioned for both the peak Christmas trading period and to achieve our full year targets

Mark Smithson Chief Executive Officer, commented:

"We've made a strong start to the year with the Group's sales up 24.8%, whilst also delivering multiple operational improvements to further enhance the customer experience. This relentless focus on operational excellence and customer service has enabled us to continue to gain share in a very competitive market, growing our share in the first half from 2.4% to 2.9% of the overall MDA market and from 4.5% to 5.4% in the online segment.

Our strategic decision to add in-house installation services to our offering has strengthened the Group's premium service proposition, alongside the creation of our own ME Academy training facility. These additions, whilst margin dilutive in the short term, will enable the Group to deliver long-term value creation and position us as the UK's leading premium electrical retailer.

Despite the first half margin pressure, which occurred within distribution costs, we continued to remain disciplined on marketing costs, maintained our focus on overhead cost control and are continuing to gain market share profitably, a key differentiator of our growth strategy.

Our market-leading customer service and next day delivery, combined with in-house installation expertise through our vertically integrated operating model, provides a compelling and unique offering, that sets us apart from the competition.

As momentum builds going into the peak trading period, with continued double-digit revenue growth in October and a strong start to November, our focus on operational excellence and customer service, combined with our strong net cash position, provides us with a robust platform to improve profitability in the second half and achieve our full year targets."

^Notes

^{(1)   Adjusted EBITDA is a non-statutory measure defined as earnings before interest, tax, depreciation, and amortisation and adjusted for exceptional items, share-based payment charges and revaluation of investments.}

^{(2)   Return on Capital Employed (ROCE) is defined as Adjusted EBIT / (Total Assets - Current liabilities)}

^{(3)   Adjusted EPS is a non-statutory measure of profit after tax, adjusted for exceptional items, ERP replacement project, share-based payment charges and revaluation of investments, over the total diluted ordinary number of shares in issue.}

^{(4)   Based on the Group's analysis of GfK Market Intelligence sales tracking GB data, Major Domestic Appliances. During the year GfK reclassified floorcare from major domestic appliances to small domestic appliances. As such the current year 2.9% is on the new definition and the prior year 2.0% has been restated and is now 2.4%.}

^{(5)   Operating cash flow for cash conversion is defined as cash generated from operations less outflows for lease payments and exceptional items}

^{(6)   Net cash/(debt) represents cash and cash equivalents less financial liabilities (excluding lease liabilities)}

Results presentations

A live online presentation for sell-side analysts hosted by Mark Smithson, CEO, and Josh Egan, CFO, will take place at 9.30am this morning. Please contact markselectrical@dentonsglobaladvisors.com for further information.

In addition, management will also provide a live online presentation for investors at 2pm on 20 November 2023. The online event is open to all existing and potential shareholders and registration is free. Questions can be submitted during the presentation and will be addressed at the end. To register, please go to: link to sign up.

A recording of the presentation will be available shortly after the event at this link: Marks Electrical content page.

Enquiries:

Marks Electrical Group plc                                                                                         Via Dentons Global Advisors:

Mark Smithson, CEO                                                                                                                       Tel: +44 (0)20 7664 5095

Josh Egan, CFO                                                                                                                  

Dentons Global Advisors (Financial PR)

Jonathan Brill / James Styles / Nishad Sanzagiri                                                                             Tel: +44 (0)20 7664 5095

markselectrical@dentonsglobaladvisors.com                                                                                                                                                 

Canaccord Genuity (NOMAD and Broker)

Max Hartley / George Grainger (NOMAD) / Kit Stephenson (Sales)                                                Tel: +44 (0) 207 886 2500

About Marks Electrical

Marks Electrical is a fast growing, highly scalable premium electrical retailer which sells, delivers, installs and recycles a wide range of household electrical products. The Group was founded in Leicester in 1987 by Mark Smithson and has scaled into a nationwide online retailer with a compelling growth track record, thanks to its vertically integrated, low-cost, high-quality operating model, supported by the ongoing structural shift of consumers to purchase online. The Group operates within the UK Major Domestic Appliances (MDA) and Consumer Electronics (CE) market, estimated to be worth approximately £7 billion.

Primarily through its simple, clear and intuitive website - markselectrical.co.uk - the Group offers over 4,500 products from over 50 leading brands across its main product categories, which include Cooking, Refrigeration, Washers & Dryers, Dishwashers and Audio-Visual. These products are sourced from UK distributors of the brands, with whom the Group maintains strong and direct relationships. Marks Electrical delivers direct to customers in its owned and branded vehicles, operated by the Group's skilled team of delivery drivers, who are also able to offer installation and recycling services.

For further information, visit the Marks Electrical corporate website: https://group.markselectrical.co.uk and its retail website: https://markselectrical.co.uk/.

Group CEO review

We've made a strong start to the year with the Group's sales up 24.8%, whilst also delivering multiple operational improvements to enhance the customer experience.

Our strategic decision to add in-house installation services to our offering has strengthened the Group's premium service proposition, alongside the creation of our own "ME Academy" training facility. These additions, whilst margin dilutive in the short term, will enable the Group to deliver long-term value creation and position us as the UK's leading premium electrical retailer.

We proudly maintained our industry leading Trustpilot score of 4.8, reaching over 55,000 reviews with 95% of those reviews being 4 and 5 star, demonstrating the strength of our best-in-class customer proposition and the continued focus that our teams across the business put into delivering an excellent customer experience.

Market share

Our primary focus remains on the Major Domestic Appliances (MDA) segment, where we gained 50bps of market share from 2.4% to 2.9% during our first half, with a greater improvement in the online segment from 4.5% to 5.4%. This was a strong performance against a relatively stable MDA market.

In Consumer Electronics (CE), we made further advances from 0.3% to 0.5% market share, with our online market share growing from 0.6% to 0.9%. This still represents a very small market share and we are excited about the growth opportunities ahead.

Despite the growth in our TV business being over 70%+ in the first half, and with this being typically lower margin sales than our core MDA business, thanks to our tight operational grip, we were able to maintain our gross product margin at 24.9% with the minor decline from 25.2% in H1-23 being driven by the CE mix impact.

Strategic growth initiatives

Our strategy is to become the UK's leading premium electrical retailer. To achieve this, we split our focus into four key areas:

1.     Customer proposition

Our unique operating model distinguishes us in the Major Domestic Appliances sector, consistently providing next-day delivery services for in-stock items to over 90% of the UK population. Along with this, our installation services, covering gas, electric, integrated and television installations, further enhance our customer proposition and are available to over 70% of the UK population.

During H1-24 we have seen significant growth in our premium next-day service offerings with installation services achieving over 7,000 installation orders in the first half, vs. 2,500 in the prior year (+180%), and over 11,000 freestanding connection services vs. 5,000 in the prior year (+120%). All of this whilst maintaining our industry leading Trustpilot score of 4.8.

Our strategic partnerships with a diverse range of premium brands, combined with our focus on best-in-class, in-house installation and connection services, enables us to deliver an excellent customer offering and positions us favourably to continue gaining profitable market share.

Our customer proposition centres around the vertical integration of our delivery model, using our own fleet of vehicles, employed drivers and installers, enhanced by our in-house training facility ME Academy, enabling us to deliver high standards of installation and connection training to improve the customer experience.

2.     Brand awareness

We have continued to invest in our brand awareness campaigns during H1-24, with further activity in television, radio and out-of-home advertising, including:

·   Continued investment in television marketing, including Sky and Channel 4, introducing a range of new adverts throughout the period featuring our mascot MRK 1;

·      Strategically investing in radio ads with stations that fit our customer demographic, to target premium product sales;

·      Out-of-home focus located in areas of strategic importance for maximum impact; and

·      Increased presence on social media platforms.

We served over 100,000 customers during H1-24 with 24.5% of these being returning customers. This demonstrates our market leading customer service levels driving repeat business once someone has come into contact with the Marks Electrical brand. 

3.     Operational capacity

In H1-24, we completed significant enhancements to our warehouse and distribution centre. We invested in improved racking and very narrow aisle (VNA) systems, optimising capacity and expediting order picking. Additionally, we increased our loading and unloading capacity by introducing new dock levellers. These levellers allow for efficient rear unloading of HGVs, substantially reducing unloading times, and increasing our stock throughput capacity for outbound loading.

We developed our in-house vehicle maintenance centre by acquiring new equipment and expanding our team, resulting in increased vehicle availability and reduced fleet downtime, with fewer vehicles off-site for extended periods.

We increased our delivery capacity by adding 20 new vehicles, supporting the rapid growth of our installation team. Additional delivery vehicles are scheduled for delivery in H2-24, further enhancing our delivery capacity and demonstrating our confidence in the growth opportunities ahead.

4.     Financial performance

Our financial performance has been robust with 24.8% revenue growth and gross product margin of 24.9% in H1-24, highlighting the strength of our product and customer value proposition.

The strategic decision to introduce our own installation service, combined with inflationary pressures in distribution costs impacted H1-24 margins, but we expect this pressure to ease over H2-24 as we benefit from improved operating leverage during the peak trading period.

Our laser-focus on working capital management continued and we were able to improve inventory efficiency, reducing inventory days from 82 days in H1-23 to 64 days in H1-24. We have delivered an operational cash conversion of 145%, finishing the period with a net cash position of £10.9m, demonstrating the highly cash generative nature of our operating model.

We believe that the combination of profitable growth, high return on capital, and dividend income offers an attractive proposition for total shareholder returns.

Outlook - well placed to deliver profitable market share growth

Our current share of the UK MDA market of 2.9% and online share of 5.4% continues to provide significant scope and opportunity for growth. Our market-leading customer service and next day delivery, combined with in-house installation expertise through our vertically integrated operating model, provides a compelling and unique offering, that sets us apart from the competition.

As momentum builds going into the peak trading period, with continued double-digit revenue growth in October and a strong start to November, our focus on operational excellence and customer service, combined with our net cash position, provides us with a robust platform to improve profitability in the second half and achieve our full year targets.

Mark Smithson

Chief Executive Officer
 

Financial review

The Group made a strong start to FY24, against a broadly flat market back-drop. Sales growth was widespread across product categories, with notable increases in televisions, washer dryers, ovens, and energy-efficient major domestic appliances. Throughout this period, we maintained our focus on profitable market share expansion, despite headwinds in distribution and installation costs. While these factors put pressure on H1-24 margins, we expect this to ease over H2-24 as we benefit from operating leverage in the peak trading period.

In order to help improve understanding of the income statement dynamics, we have added additional disclosure and are now reporting gross product profit margin and distribution and installation costs as separate line items.

Revenue and gross product profit

In H1-24 the Group delivered a strong revenue performance, up 24.8% to £53.9 million. Gross product profit margin was 24.9%, down 30bps from H1-23, driven by product mix as a result of our 70%+ growth in television which typically attracts a lower margin than Major Domestic Appliances (MDA).

We expect an improvement in gross product profit margin in H2-24, as we enter the peak trading period.

\* The presentation of cost of sales and gross profit has been redefined in the H1-24 results and comparatives have been amended. This change splits our gross product profit and distribution and installation costs. This decision was made to aid the understandability of movements within gross margin for the users of the financial statements.

Distribution and installation costs

The strategic decision to introduce our own installation service, combined with inflationary pressures in driver costs impacted our H1-24 distribution and installation cost base. The 200bps cost increase from 7.1% of sales to 9.1% of sales was the main contributor to the overall Group EBITDA margin decline in the first half.

Whilst the addition of in-house installation services are margin dilutive in the short term, the services are now break even, whereas outsourcing the services in the prior year was a loss-making activity in order to generate the product sale, which we considered to be unsustainable. As the business grows and density improves, there will be improved operating leverage on the installation cost base.

Long-term, having this service vertically integrated strengthens our proposition, enhancing the overall value opportunity and assisting in positioning us as the UK's leading premium electrical retailer.

We expect distribution and installation costs in H2-24 to be broadly similar to H1-24, as a percentage of sales.

Advertising and marketing costs

During H1-24, advertising and marketing costs remained consistent year-on-year, at 5.6% of revenue. Marketing was allocated across various channels, including digital marketing, social, TV, radio and out-of-home campaigns in order to ensure we managed the correct mix of performance marketing and brand awareness.

We anticipate a slightly lower level of investment in advertising & marketing in H2-24 to keep us on track for our 5.0% of sales target and to leverage the investments made in the first half.

Other operating expenses (excluding depreciation)

Other operating expenses decreased as a percentage of revenue to 5.9% in H1-24 versus 6.3% in H1-23, and 6.7% in FY23, as we retained a tight control on our operating cost base.

We anticipate improved operating leverage in H2-24, keeping us in line with stated full year target of 5.5 - 6.5% of revenue.

Adjusted earnings before Interest, Tax, Depreciation and Amortisation ("EBITDA")

The Group achieved Adjusted EBITDA for the period of £2.3m representing a margin of 4.3%, down 200bps against H1-23. This decrease in margin year on year is a direct result of the increase in distribution and installation costs as previously detailed.

We anticipate an improvement in Adjusted EBITDA margin in H2-24, as we benefit from peak trading and improved operating leverage.

Statutory Profit after tax

During the year statutory profit after tax was £0.9m, down £0.8m versus H1-23 at £1.7m. This decrease is primarily due to increased distribution and installation costs and exceptional costs incurred in relation to our ERP implementation project.

ERP implementation project

During the period we incurred costs of £0.4m in relation to our ERP implementation project, which is anticipated to span FY24 and FY25. For the purposes of aiding comparability, these costs are removed from adjusted financial performance measures. During the period the project had a cash outflow of £0.2m due to invoice timing.

Share-based payments

The Group issued new awards under its long-term incentive plan during the year to senior and junior management. This,

combined with the market value options and free shares awarded in FY23 resulted in a P&L charge of £0.1m (2023: £0.1m).

This charge and related professional fees are removed from adjusted financial performance measures.

Depreciation

Depreciation has increased to £0.8m (H1-23: £0.6m), this was driven by:

·      Fleet modernisation and growth to accommodate the increase in sales volumes; and

·      Leasehold improvements including; office refurbishment to increase capacity, dock levellers, the ME Academy training facility and new racking to improve warehouse efficiency.

Taxation

Tax expense is recognised based on management's best estimate of the average annual income tax rate expected for statutory

the pre-tax income of the interim period. The expense for the six months ended 30 September 2023 is £291,000 (H1-23: £379,000). The Group's adjusted consolidated effective tax rate for the six months ended 30 September 2023 is 25.0% (H1-23: 17.9%) in line with the increase in the corporation tax rate from 19% to 25% effective from 1 April 2023. The deferred tax liability is expected to reverse within 36 months.

Earnings per share

Basic earnings per share ("EPS"), which is calculated for both the current and comparative period based upon the weighted average number of shares in the year, is 0.83p per share (H1-23: 1.66p per share).

Adjusted EPS is 1.11p per share (H1-23: 1.66p per share), the table below shows the reconciliation between statutory and adjusted earnings per share. See Note 3 to the financial statements for further details.

Cashflow and statement of financial position

During H1-24 the Group achieved and adjusted cash flow from operations of £3.8m and free cash flow of £1.7m. This operational cashflow generation is primarily due to working capital improvements, including the negotiation of new terms with suppliers enabling a £2.5m increase in payables, and improved efficiency in inventory turn through a reduction in inventory days.

During the period, the Group has made selected capital investments to accommodate growth, including the conversion of a new office space, increased fleet capacity through the addition of 20 more vehicles, and warehouse improvements to increase efficiency and stock capacity. In addition to operational improvements, during the period we developed the ME Academy, a bespoke, purpose-built in-house training centre for our drivers and installers. In H1-24 the total capital expenditure amounted to £1.4m (H1-23: £0.08m).

The Group closed the period in a net cash position of £10.9m versus £10.0m at FY23 and £7.7m at H1-23.

Events after the reporting period

There have been no material events to report after the end of the reporting period.

Current trading and outlook

Whilst the addition of in-house installation services and driver cost increases added pressure to the first half margin, we believe that long-term, having these services vertically integrated enhances the overall value creation and assists in positioning us as the UK's leading premium electrical retailer. Furthermore, as we benefit from improved gross product profit margin and operating leverage during the peak trading period in H2-24, we expect to improve our Adjusted EBITDA margin and remain on track to achieve our full year targets.

Consolidated Statement of comprehensive income

Six months ended 30 September 2023

\* The presentation of cost of sales and gross profit has been redefined in the H1-24 results and comparatives have been amended. The change made splits our gross product profit and distribution and installation costs. This decision was made to aid the understandability of movements within gross margin for the users of the financial statements.

Consolidated Balance sheet

At 30 September 2023

The interim financial statements of Marks Electrical Group plc were approved by the Board on 15 November 2023 and signed on its behalf by:

Josh Egan

Chief Financial Officer