Marks Electrical Group plc

Results for the six months ended 30 September 2022

Continued trading momentum, resilient profit performance and strong market share gains

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 2022 ("the Period" or "H1-23" or "first half").

Financial highlights

• Strong first half revenue growth of 15.1% to £43.1m (H1-22 £37.5m)
• Resilient profit performance in tough market conditions with Adjusted EBITDA⁽¹⁾ of £2.7m (H1-22 £3.0m), delivering a margin of 6.3% and keeping us on-track to deliver on our full year targets
• Continued focus on working capital management, improving inventory days and driving a strong operating cash conversion of 189%
• Free cash flow of £4.5m (H1-22 £5.9m), representing a free cash flow margin of 10%
• Adjusted EPS of 1.66p (H1-22 2.14p)⁽³⁾, Statutory EPS of 1.66p (H1-22 1.55p)
• Robust, debt-free balance sheet with closing net cash position of £7.7m (H1-22 £1.3m), supporting an interim dividend of 0.30p per share

Operational highlights

• Growth in Major Domestic Appliances ("MDA") market share from 1.6% in H1-22 to 2.1% in H1-23, with our share in the online segment of the market growing from 2.6% to 3.9%⁽⁴⁾
• Growth in Consumer Electronics ("CE") market share from 0.2% in H1-22 to 0.3% in H1-23, with our share in the online segment of the market growing from 0.4% to 0.6%⁽⁴⁾
• Strong performance driven across all major product categories, with A-rated energy efficient laundry appliances growing at over 35% in the period, versus less efficient models staying broadly flat
• Investments in on-screen, social media and out-of-home marketing activities drove improved brand awareness from 7% to 10%⁽⁷⁾
• Expanded our geographic footprint further into Glasgow, Edinburgh, Cornwall and further parts of Wales, where we have seen strong demand for our customer leading proposition
• Maintained industry leading Trustpilot score of 4.8, demonstrating our commitment to operational delivery and customer satisfaction

Outlook

• Acceleration of revenue growth in October and strong start to November leave us well positioned to achieve our full year targets

Mark Smithson Chief Executive Officer, commented:

"I'm proud of the performance we've delivered against a tough back-drop, with the Group's sales up 15.1% in a very challenging market where the online MDA and CE markets were down over 15% in our first half. This further demonstrates the resilience of our business model and the attractiveness of our market-leading customer offering.

Our focus on operational excellence, customer service, and improving brand awareness has enabled us to continue to gain share in a very competitive market, where our share grew from 1.6% to 2.1% of the overall MDA market and from 2.6% to 3.9% in the online segment. As more people across the UK come into contact with the Marks Electrical proposition and become customers, we are able to harness our highly efficient, single-site operational model to drive profitable market share growth.

The strong competitive activity we saw in pricing and marketing during the first half has begun to ease more recently and despite the margin pressure, we were able to achieve an Adjusted EBITDA margin of 6.3%, keeping us on track to achieve our full year objectives and continuing to demonstrate the differentiated margin proposition of our operating model.

As growth momentum continues to build going into the peak trading period, with an acceleration in October and a strong start to November, our focus on operational excellence and cash flow generation, combined with our net cash position, provides us with a robust platform to generate continued profitable market share growth and deliver on 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, share-based payment charges and revaluation of investments, over the total diluted ordinary number of shares in issue. The number of ordinary shares as at 5 November 2021 through to 31 March 2022 have been used as the basis for the current and prior periods adjusted  earnings per share calculation. The shares in issue since IPO  represents an indication of the future weighted average number of ordinary shares for evaluating the performance of the Group}

^{(4)    Based on the Group's analysis of GfK Market Intelligence sales tracking GB data;}

^{(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)}

^{(7)    All figures, unless otherwise stated, are from YouGov Plc. Total sample size was 3,728 adults. Fieldwork was undertaken between 25 October - 2 November 2022. The survey was carried out online. The figures have been weighted and are representative of all England adults (aged 18+).}

Results presentations

An in-person presentation for sell-side analysts hosted by Mark Smithson, CEO, and Josh Egan, CFO, will take place at 09.30am this morning. Please contact [email protected] for further information.

In addition, management will also provide a live online presentation for investors at 12.30pm on 10 November 2022. 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 / Fern Duncan                                                                                 Tel: +44 (0)20 7664 5095

[email protected]                                                                                                                                                                                                 

Panmure Gordon (NOMAD and Joint Broker)

Oliver Cardigan / Dougie McLeod (Corporate Finance)                                                                Tel: +44 (0) 207 886 2500

Erik Anderson (Corporate Broking)                                                                                   

Berenberg (Joint Broker)

Matthew Armitt / Michelle Wilson / Richard Bootle (UK Investment Banking)                                Tel: +44 (0) 20 3207 7800

About Marks Electrical

Marks Electrical is a fast growing, highly scalable, technology driven e-commerce electricals 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 up 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 £8.0 billion.

Primarily through its simple, clear and intuitive website - markselectrical.co.uk - the Group offers over 4,000 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 made a strong start to FY23, with first half revenue growth of 15.1% and an Adjusted EBITDA margin of 6.3%, setting us on-track for delivery of our financial targets.

We achieved this against a particularly challenging market back-drop and with the online Major Domestic Appliances (MDA) and Consumer Electronics (CE) markets being down over 15% in the first half.

Our focus on operational excellence, customer service, and improving brand awareness has enabled us to continue to gain share in a very competitive market, where our share grew from 1.6% to 2.1% of the overall MDA market and from 2.6% to 3.9% in the online segment.

Market share - a significant growth runway

As a business we are predominantly focused on the MDA market and have also been expanding our footprint in the CE market, primarily in the television category.

During the first half of our financial year, the online market for both MDA and CE has been challenging with the first quarter (April to June) showing a decline of over 20% and the second quarter (July to September) a decline of over 10%. Continuing the trends seen in FY22, the online markets for MDA and CE have been in successive decline year on year for over 12 months now, yet despite the challenging market dynamics, we have grown consistently throughout this period.  

It's these statistics that are truly exciting; we have a tiny share of an enormous market which has allowed us to be agile and flexible in navigating this challenging period, but also provides us with confidence for the future, given the huge runway to grow profitably.

Our market-leading customer service, free next day delivery offering and differentiated operating model, gives us a compelling customer proposition and leaves us in a position of strength to take further market share across the UK.

Our strategy for growth

We put the customer at the heart of everything we do and have four key elements to our strategy for growth:

1.     Customer proposition

Our operating model is unique across the Major Domestic Appliances sector in that we consistently offer free next day delivery for in-stock items throughout our wide range of products, across over 90% of the UK population.

Our ability to achieve this unique proposition centres around the vertical integration of our delivery model, with our own fleet, employed drivers and installers, and our centralised single-site distribution centre, maximising efficiency and improving financial returns.

During the period we have made substantial progress in developing our customer proposition, including:

• Expanding our delivery areas to Cornwall, Glasgow, Edinburgh, and throughout all of Wales;
• Developing our range of SKUs across MDA and CE, whilst starting the development of our computing category;
• Adding additional third-party finance offerings to provide new credit solutions and interest free options for customers;
• Developing our new integrated installation offering with our own employed team of installation engineers; and
• Maintaining our industry leading Trustpilot score of 4.8.

We are focused on providing a market leading customer service proposition that sets us apart from the competition and allows us to continue to gain profitable market share.

2.     Brand awareness

During the period we updated our brand awareness study which demonstrated that only 10% of the population in England had heard of Marks Electrical. This was an increase of 3 percentage points against the study we carried out at the end of FY22,  demonstrating the growth in brand awareness and the opportunity to continue growing this over time. Our focused brand building activities across on-screen and across social media helped us improve awareness, and this, coupled with our expanded delivery areas will continue to enable us to grow awareness of Marks Electrical across the UK.

We strongly believe that our market-leading service drives strong repeat business and once we have acquired the customer, they will make further purchases from us. This is exemplified in our strong repeat customer rate, which was 26% in H1-23 and we were proud to serve over 4,000 returning customers in the month of September, a first for the business!

Our marketing activities are geared towards developing our brand and we are deploying a range of both digital and non-digital campaigns to strengthen our proposition and capture more attention in the months ahead.

3.     Operational capacity

During the period we have made further improvements to our warehouse to add additional mezzanine flooring and raise ceiling heights, allowing for a higher level of capacity. In addition, we have improved inventory days allowing us to make better use of our existing space as we increase throughput to achieve higher revenue levels during the peak period.

We have moved our operational warehouse teams to a four on four off shift pattern, allowing us to operate 24/7 and align the shift patterns with our delivery teams. Alongside this we have continued to add roles in our customer services, sales and administrative teams.

As part of our improvements across our operational capacity, we have started to develop our own in-house installation team, by recruiting experienced installation engineers, allowing us to bring in-house, integrated, gas and electrical appliance installation services that were historically outsourced. This service offering is now ramping up rapidly and we are excited about its prospects.

As we prepare for future growth we have ordered 10 new installation vehicles and 12 additional delivery vehicles that will arrive during late 2022 and in 2023. We are confident in our future prospects and are therefore investing in our people, processes and capacity to continue our growth.

4.     Financial performance

The strong competitive activity we saw in pricing and marketing during the first half has begun to ease more recently and despite the margin pressure this has had we were able to achieve an Adjusted EBITDA margin of 6.3%, along with revenue growth of 15.1%. This keeps us on track to achieve our full year targets and continues to demonstrate the differentiated margin proposition of our operating model.

We made continued progress on working capital management and delivered an operational cash conversion of 189%, demonstrating the highly cash generative nature of our earnings model and enabling us to finish the period with a net cash position of £7.7m and a Return on Capital Employed of 49%.

This strong cash performance means we can reinvest in the growth of the business, whilst remaining debt free, and simultaneously provide returns for shareholders through dividends. We were proud to pay our maiden dividend in August 2022 and are declaring our first interim dividend for FY23 in December 2022 of 0.30p.

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

Outlook - well placed to deliver profitable market share growth

We believe that our current share of the UK MDA market of 2.1% and online share of 3.9%, continues to provide significant scope and opportunity for growth. Our market-leading customer service and free next day delivery, combined with in-house installation expertise, provides a compelling and unique offering, that sets us apart from the competition.

As momentum continues to build going into the peak trading period, with an acceleration of revenue growth in October and a strong start to November, our focus on operational excellence and cash flow generation, combined with our net cash position, provides us with a robust platform to generate continued profitable market share growth and achieve our full year targets.

Mark Smithson

Chief Executive Officer

Financial review

The Group made a strong start to FY23, against a particularly challenging market back-drop. Sales growth was driven across the board, with more significant gains in televisions, cookers, vacuums and energy efficient major domestic appliances. We have maintained our focus on profitable market share growth, against heightened levels of competitor discounting and marketing and whilst this put pressure on H1-23 margins, we expect this to ease over H2-23 given reduced competitor discounting in recent months, our tight focus on cost control and improved operating leverage during the peak trading period.

Revenue and gross margin

Revenue has increased 15.1% year on year to £43.1m, whilst during the same period the online MDA and CE markets were down over 15%. This relative outperformance resulted in our share of the MDA market increasing by 50bps from 1.6% in H1-22 to 2.1% in H1-23.

Revenue growth in H1-23 has been driven by investments in brand awareness, an increased focus on having a wider breadth of in-stock SKUs and our improved customer proposition.

Gross margin was 18.1%, down 110bps from H1-22, primarily driven by increased competitor discounting during Q1-23, increased fuel costs throughout the period and the increased national insurance on drivers' wages.

The margin pressure due to competitor discounting eased toward the end of Q2-23 and we have seen further improvements during October. As a result, we anticipate an improved gross margin in H2-23, with stronger product margins, a reduction in fuel costs as a percentage of sales, lower national insurance on drivers' wages, and better leverage over the fleet and driver-installer cost base.

Advertising and marketing costs

Advertising and marketing costs were 5.6% of revenue in H1-23 versus 5.1% in H1-22 as a result of increased investments made in brand building activities to drive improved brand awareness prior to the peak trading period.

In digital advertising, we continued our focus on paid media and search engine optimisation, ensuring that we directed our investments carefully for maximum return during a period of heightened competitor spend levels.

In brand building, in order to improve our brand awareness, we carried out further on-screen campaigns across Sky, ITV, Channel 4 and YouTube. Social media activity was an increased focus in H1-23 in order to develop our brand across key social channels, including Facebook, Instagram and TikTok. Our focus in H2-23 is to develop our out-of-home display activities in order to reach a wider audience in targeted locations, whilst continuing our on-screen and social media presence.

We anticipate a slightly lower level of investment in advertising & marketing in H2-23 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 were broadly flat at 6.2% of revenue in H1-23 versus 6.1% in H1-22. The changes during the period were a result of plc related costs that were not incurred in H1-22, national insurance increases on employee wages, and increased business rates following COVID-19 reliefs coming to an end. These were partially offset by operating leverage on the overhead base.

We anticipate a similar level of spend in H2-22 keeping us in line with our 5.5 - 6.5% of revenue target.

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

The Group achieved Adjusted EBITDA for the period of £2.7m representing a margin of 6.3%, down 180bps against H1-22.

This decrease in margin year on year is a direct result of events aforementioned, namely:

·      110bps reduction in gross margin due to competitor discounting and increased fuel & national insurance costs;

·      50bps increase in advertising & marketing costs as we maintain our focus on expanding brand awareness prior to the peak trading period;

·      50bps in relation to additional costs of operating as a plc; and

·      30bps savings as a result of cost control and operating leverage.

We anticipate an improvement in Adjusted EBITDA margin in H2-23, as we benefit from reduced discounting during the peak trading period and improved operating leverage.

Depreciation

Depreciation has increased to £0.6m (H1-22 £0.3m), this was driven by:

·      Fleet modernisation and growth to accommodate the increase in sales volumes, thereby increasing right of use assets depreciation by £0.1m;

·      On 30 September 2021 the Group's property was disposed of on a sale and leaseback arrangement, leading to an increase in property right of use assets depreciation by £0.2m; and

·      Other property, plant and equipment depreciation charges have remained broadly flat.

Cashflow and statement of financial position

During H1-22 the Group achieved cash flow from operations of £5.6m and free cash flow of £4.5m. This strong performance demonstrates the highly cash generative nature of our earnings model.

During the period, capital expenditure has been relatively light as significant investments were made in FY22. We have spent £80,000 on warehouse improvements during H1-23, including further extension of the mezzanine floor, raising ceiling heights and improving the lighting and layout to enable a more efficient operation.

We have made additional investments in the fleet acquiring three new delivery vans on finance leases with a capital value of £111,000, including a cash outflow for deposits of £33,000. We expect to receive an additional 10 installation vans before the year end.

The Group closed the period in a net cash position of £7.7m versus £3.9m at the FY22 year end and £1.3m at the H1-22 period end, primarily as a result of strong EBITDA conversion and continued working capital improvements.

Current trading and outlook

The resilient performance delivered in the first half provides us with solid foundations to deliver our strategic objectives in H2-23.

The business has continued to prosper during the start of the second half, with an acceleration in sales momentum in October and a strong continuation into November. As we benefit from improved gross margin and operating leverage during the peak trading period, we expect to improve our Adjusted EBITDA margin in H2-22 and remain on track to achieve our full year targets.

Consolidated Statement of comprehensive income

Six months ended 30 September 2022