FY24 results well ahead of expectations – on course to hit operating margin target for FY25E

IG Design Group’s trading update for the year ended 31 March 2024 has exceeded market expectations in terms of both profitability and, most significantly, cash generation. The FY24 results confirm the progress the group has made on its strategic journey to simplify the business and improve operational efficiency. Notwithstanding ongoing uncertainty on the economic backdrop and consumer expenditure, the group remains confident of delivering its target of returning to its pre-Covid adjusted operating margin level (4.5%) for the year ending 31 March 2025 (FY25E).

FY24 results well ahead of expectations – on course to hit operating margin target for FY25E

Sanderson Design Group (SDG) has announced its FY24 full-year results, which are in line with the headline figures from its February trading update. A record year for Licensing and a strong performance in the key North America market helped to offset a challenging consumer environment in other geographies, most notably the UK. While this backdrop is set to persist in FY25E, the group will continue to focus on its strategic growth drivers, notably North America and Licensing, to deliver shareholder value.

Strategic growth drivers show their value in challenging trading conditions

At its FY23 results in June 2023, G4M announced its intention to focus on product margins, overhead cost reduction, and efficiency ahead of revenue growth, along with further net debt reduction, in FY24. The FY24 year-end trading update confirms G4M has delivered on these rebalanced priorities, with gross margin rising and net debt almost halving compared with FY23. Cost savings achieved in FY24 and the continued development of higher-margin categories should deliver further upside in FY25E.

FY24 trading in-line and debt reduction ahead of market expectations

Sanderson Design Group (SDG) has announced it is to launch a dedicated online store for its iconic and second largest brand, Morris & Co, in the second half of 2024. This marks a major step-up for the group in terms of e-commerce and the direct-to-consumer (DTC) channel, where its presence to date has been limited to the smaller Scion brand. While not anticipated to make a significant financial contribution in FY25E, this represents an important strategic initiative for SDG to exploit another channel to market and optimise distribution of its heritage brand assets.

Morris & Co to launch online store

Sanderson Design Group has delivered its full-year trading update to 31 January 2024. Group revenue has eased back 3.1% to £108.5m on a reported basis, following the 2% decline in H1. The strongest performances were delivered by the strategic growth cornerstones of Licensing and North America, offset by challenging market conditions in the UK, Europe and the Rest of the World. A strong balance sheet saw year-end cash rise to £16.2m, compared with £15.4m at year-end FY23. Having traded in line with management expectations, underlying profit of around £12m is expected for FY24, with similar also indicated for FY25 reflecting cost pressures.

Strategic growth pillars bolster results

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G4M’s pattern of trading across the Q3 peak period (to 31 December) closely mirrored that seen in H1. UK revenues were marginally higher, while total group revenues were 6% lower than last year, reflecting the challenging market conditions in Europe. A strong 260bp advance in gross margin more than offset the revenue decline, delivering a £0.4m increase in gross profit against Q3 FY23. Combined with cost reductions that were in line with Board expectations, the group continues resolutely to focus on its objective of prioritising profitability over top-line growth. This in turn ensures that G4M is well positioned to deliver profitable growth in FY25E.

Strong Q3 gross margin progress in line with new operating model priorities

IG Design Group delivered a 27% increase in adjusted PBT to $34.8m for H1 FY24 (to 30 September) with a significant reduction in net debt to $15.1m, as signposted in last month’s trading update. The adjusted operating profit margin was some 270bps higher at 8.6% (vs 5.9% in H1 FY23), the highest achieved since H1 FY20 ahead of the CSS acquisition. Management has provided more details on the key attributes and initiatives for its new growth-focused strategy. The group is on track to return to pre-Covid adjusted operating margins, aspiring to a 5% level in FY25E compared with FY20’s pro forma 4.5% (including CSS on a FY basis), rising to over 6% in FY27E on a $900m revenue aspiration.

Strong profit growth, key strategy initiatives and quantified aspirations

G4M’s interim results clearly reflect the group’s previously expounded prioritisation of improved gross margins and lower costs over revenue growth against a difficult market backdrop. The former goal delivered an 80bps increase in gross margin, while the cash savings initiatives announced in October will bear fruit from H2 and beyond. Hence, despite G4M resetting FY24E revenue expectations to £144m (vs FY23’s £152m), the FY24E adjusted profit outlook remains in line with consensus market expectations.

Switching the levers to protect profitability against a challenging trading backdrop

IG Design Group has delivered substantial growth for the H1 trading period (to 30 September) in terms of key profit measures and margins, together with strong cash flow and net debt reduction, both of which exceeded management expectations. These achievements have been attained despite lower sales compared to H1 FY23, with the adjusted operating profit margin in H1 FY24E therefore set to surpass last year’s 5.9%. As such, the overall results clearly show the ongoing benefits of the group’s strategic initiatives to simplify the business and increase operational efficiency. The board believes FY24E full-year trading results remain in line with its expectations.

H1 trading sees significant net debt reduction and profit growth despite lower sales

The shape of G4M’s trading performance in H1 (to 30 September) clearly reflects the strategic prioritisation of gross margin and cost efficiencies over revenue growth in a challenging market. This strategy was clearly signposted at the FY23 results in June. While total revenue fell back 6% in the period (£62.6m vs £66.3m), an offsetting 80bps gross margin improvement holds the expected gross profit decline to 3% (£17.0m vs £17.4m). With H2 set to benefit from the £4m of annualised cash savings instigated in H1, G4M believes that the FY24E full-year outlook is in line with consensus market expectations.

H1 trading prioritising gross margin and cost savings ahead of revenue growth

Sanderson Design Group (SDG) has reported an 8% increase in interim adjusted PBT, to £6.8m. This was achieved despite a weak backdrop in the home UK market and a 2% decrease in overall group revenue. Increased profitability was driven by strong performances in two of its key and higher-margin strategic growth pillars – Licensing and North America – which grew by 82% and 10%, respectively, on a reported basis. New product launches, including Disney Home x Sanderson, have seen sampling running at encouragingly high levels, boding well for the medium term. With H2 trading likely to broadly reflect H1 patterns, we have recast the shape of our forecasts, though with unchanged PBT and EPS outturns.