When it comes to a touch of luxury and quality in the home furnishings market, there is surely one particular stand out from the crowd.
Notably, this coming in the form of the AIM quoted Sanderson Design Group (SDG).
Whilst this may sound more like the opening of a PR pitch, stay with me, as in the case of SDG, I do speak with some past first-hand experience of its products - which for me at least - adds to an already positive investment case.
Back in the day when I served an apprenticeship in Painting & Decorating, the name of Sanderson personified and resonated quality across the space. There was, back then, even a small Sanderson outlet located in the centre of Cambridge, which any tradesman worth his salt frequented.
Much of course has changed for the brand since then and in the subsequent years, where it now forms an enhanced range of other quality names.
These include Clarke & Clarke, Morris & Co, Harlequin, Zoffany and Scion, resulting in an industry wide recognition of what is offered and delivered.
However, from an investment perspective, SDG has somewhat eluded my attention and only more recently figured on my radar, where, after researching and even sounding out opinions on its products from some old colleagues in the industry, I elected to take a starter position.
There is certainly much for warming to here, and although being exposed to the vagaries of discretionary spend which may be feeling an ill wind, it is worth noting that SDG largely operates at the higher and more luxury end of the market, which historically tends to fair better in tough times.
As part of my ongoing delving deeper into the story, I have also been fortunate enough to speak with Lisa Montague the CEO, who with an extremely impressive and seasoned background took over the reins at SDG back in 2019.
Montague has, since heading up the business been exposed to something of a harsh backdrop that she has had to contend with, including post Brexit issues, the Pandemic, difficulties around Putin’s invasion of Ukraine along with the supply chain disruption that brought, not to mention rising costs.
Still, the performance has been impressive nonetheless given those headwinds and SDG’s most recent Interim Results were positive, with some very decent margins being delivered, highlighted by the Morris & Co brand along with licensing deals delivering some impressive gains.
Speaking with Montague, it is clear there is both a real hands-on passion and determination to drive and elevate the business, although alongside this, there is an element of frustration with the various hurdles that have been encountered.
The CEO though, is a seasoned realist with what appears to be a clear direction of where the business can go and importantly, a firm belief in achieving that.
As we speak, I am reminded at the outset that the group was formerly known as Walker Greenbank, but under Montagues tenure, the name was soon changed to one that more accurately reflected what the business was about. “Walker Greenbank, didn’t really trip off the tongue and neither was it either a bank or green, so my marketing director and I decided we really had to do something about this”.
Thus, the Sanderson name came to the fore, particularly apt given its rich heritage, which in turn saw the board coming together and really looking at the whole structure and direction of the entire business.
A lot was identified and unearthed resulting in a couple of entities being closed along with a holding company and subsidiary’s being scrutinised, which the CEO said had been quite a heavy burden in terms of corporate administration. This did not result in any trading businesses being closed though, rather, they were put into a more simplified structure.
The overall result, was the birth of a far more workable and effective structure of operations that has already delivered positive results.
The group now owns two factories which are both on freehold land, those being Standfast in Lancashire, along with Anstey based in Loughborough.
Standfast has a rich history and is what Montague describes as something of an upscale high end textile mill, where it prints top quality fabrics for all the group brands, along with third party customers from the UK, Europe and US.
Anstey also prints for the whole group and the other territories and is the largest contract wallcovering printing operation in the UK and boasts the broadest machine profile across Europe. Within that, there is a design office and studio which is where the brands of Harlequin and Scion were born.
Scion is the youngest of the brands, where Montague adds, “its celebrating ten years now and although it is a small brand, it contributes, as it has great appeal in licensing and it’s a brand where you see Mr Fox Mugs in John Lewis. It is also very successful now in Next, such as across areas like kids-wear and night-wear pyjamas”.
Away from Scion, Montague expands on Clarke & Clarke that was acquired five or six years back, which although quite a young title, is now the biggest in the stable in terms of volume and revenue.
This would, in its early days been distributed in the likes of Dunelm, but Montague adds that they have now elevated it into the likes of Next and John Lewis. “That has been very helpful in these times, as the bottom end of the market has been the worst affected. It is also very strong in America which is interesting, as we believe there is a big overall opportunity there for us”.
Moving on, Harlequin stands as the second largest name having been knocked off the top by Clarke & Clarke and the two are seen as very positive for the group by the CEO who adds, “its great to have two big brands and we have been differentiating those, making sure that they each have their own identity and voice”.
A lot of background work has been undertaken with both, in particular Harlequin where there is a determined and thus far successful adoption of rich colour and prevailing trends that is able to stand the operation in good stead in a changing market.
The Zoffany brand, which although very much niche, operates in the luxury Heritage spot and is extremely highly regarded, where it serves the luxury bespoke end of the market.
As an example of what Zoffany is typically involved in, Montague comments, “we are working on a huge project with this in Atlanta Georgia at the moment and within that really operating at the very best of British design.
It had somewhat lost its way a bit before we came in, but we have taken it back to its roots, celebrating its restoration, heritage and the high-end quality we can make in the UK”.
Last, but certainly not least is Morris & Co which is a hundred and sixty years old now and finds Montague speaking extremely highly of it. This sees classic and contemporary designs that have stood the test of time and remain as popular and sought after as ever. “It has become something of a destination really, as Morris has really bounced in the last couple of years and we are constantly rescaling recolouring and revisiting the designs”.
The CEO goes on to add that Morris is the only brand that has grown consistently year on year as demonstrated within the Interim Results from last year.
Given its strong manufacturing base aligned to highly regarded brands along with its own design team, it is little wonder that SDG is the UK leader in its field.
End markets and customers, largely depend on the specific brands themselves, but the CEO says that overall, the UK is led by trade retailers. Whilst this sees some six thousand customers across the UK alone, the vast majority of which are small independent’s, in terms of volume, the top ten include big and familiar names.
John Lewis is one of the top two, joined by Brewers, the massive decorating chain that owns wallpaper direct which serves the trade element, but also increasingly the general public.
Returning to the Morris brand, Montague tells me that they have licensed its designs to Next in relation to Women’s wear which sees SDG providing the necessary design work from within its own strong team.
On the licensing front, the team here is very much aware of not overdoing it, although it is acknowledged that it is very lucrative as it drops through at 100%, where it is presently £5m-£6m of the total revenue, having grown impressively.
As part of the licensing process, the company signed an exciting and potentially significant deal last summer with Disney which the CEO tells is centred on designs from the 1930’s Fantasia period that were held in Sandersons archives.
This involved various fragments of fabric that have been scrutinised, redrawn and developed, being focused on thirteen iconic characters such as Alice in Wonderland and Snow White.
With discussions now taking place with Disney on these assets as to how best they will develop, which potentially could include other partners, Montague says that the plan is to go to market by the end of this calendar year.
At the present time, the feeling from management is that they think it will be good for SDG, but just how good is as yet unknown.
Time on that one will of course tell, but the signs and potential with Disney and others looks like another positive for SDG going forward and could have some mileage once up and running.
Whilst the UK is clearly the key market and where SDG is dominant, the US is very much on the agenda for growth, and although progress has more recently clearly been made, there is much more to go for. “In the US, you know, we don’t even feature”, Montague says, “despite us having had a business there for more than thirty years”.
As it is, the company has never sold, until recently. more than $12m worth of material in any year, despite having had a massive opportunity to leverage its brands.
Now, having identified the exciting growth opening, the CEO has accelerated the focus and they have quickly established the various distribution processes in place and gone from having twelve showrooms to north of sixty in terms of a point of sale.
Key to success in the US is knowing just how the market functions, which is totally different to the UK, with it being driven by designers who have their own studios and which, in terms of the market place also includes third party operators.
SDG is now tapping directly into the network and the ambition on the back of highly regarded and sought after brands is to move above being a sub $20m player.
Montague, adds that a lot of the competition in the US are doing a $100m per year, so even having demonstrated positive growth, there are much bigger numbers on which to target.
Interestingly, the CEO also informs me that they already print in their factories for most of the big US suppliers, which in itself seems like another positive endorsement and a link in the chain.
Of course, to produce top notch products, be it fabric or wallcoverings, ongoing investment is key to both current and future success.
To this end I am informed that whilst Standfast is 70% digital now, Anstey by contrast, remains more than 80% conventional, as the technology for wallpaper just isn’t there.
However, digitalisation is something that Montague and her team have been actively engaged on, having discussions with top engineering players. “It is coming” she says, “and it would give us a competitive advantage and we think we have a breakthrough coming too and that would move quite fast. The next solution will be game changing for wallpaper and it will give us a better print mark and surface texture, all the things we need, although it will probably never go all digital”.
Clearly, ongoing investment into its factories is key although any suggestion of some of the land at either site being realisable as saleable for residential development is dismissed.
Away from the brands and products, we touch upon energy and raw material costs, something of a headache for any business in these testing times.
Montague says it is clearly a challenge for SDG where they were under contract for electricity until October last year.
That was unavoidably poor timing, where she says that it went up somewhere near four-fold, although the recent Government input has helped.
They are however still under contract until October this year for Gas, by which time things may well have settled down a bit.
As a result of the energy cost situation, SDG has, the CEO adds, anticipated its energy costs going up a couple of million pounds for next year.
That is clearly a huge jump, although I am told that they have been working hard on energy efficiency which has already brought down their usage, whilst there are solar panels going in on the roofs with permission now granted.
There are also LED’s being used extensively, along with utilising boilers to best efficiency, all of which will stand the manufacturing arms in good stead going forward.
Looking back at the Interim results and the positive margins being delivered Montague says, “it is moving in the right direction and it has been achieved with a good mix”.
In terms of their own product portfolio, this has been reduced somewhat and will benefit on margins in both the near and longer term as whole stock turn becomes more efficient and takes down design and development costs.
And sticking with the theme of costs, we touch upon the pension deficit, which is by no means confined to SDG, being something of a millstone for many of the more longer established businesses.
On this, Montague acknowledges that it would certainly be good to get rid of it and that the board had discussed as to whether it would be a good use of surplus cash.
Whilst that hasn’t happened to date the CEO doesn’t rule out using cash at some point in order to reduce it, thus ridding the business of an annual contribution.
That said, SDG already looks on track to eliminate the deficit within the next three or four years and appears to be in a far better spot than others with a legacy issue.
With a strong and sound balance sheet sporting a solid net cash position it also consists of substantial archive assets that broker Singer highlights as being potentially undervalued.
Elaborating on this area, the CEO says that on joining she was informed there were about 75k documents in the archives, but following the onset of a digitalisation process, it appears there are most likely actually around 200k.
These will now go through various processes, including being catalogued and assessed as to the best way for extracting value ahead and that is already underway.
As with most companies and businesses, post Brexit is always worth looking at and to this end Montague says it has been about even overall.
“On the one hand” she explains “the EU countries represented about 25% of the brand business and that was heavily negatively impacted with Ireland being a disaster and it has been extremely difficult for the last year or two. Now though, we are just beginning to see EU countries improving a little bit, with Germany and Ireland back on track”.
On the plus side though, Montague adds that the manufacturing side benefited enormously, particularly Standfast because of tariff and duties on textiles, particularly for businesses importing and then selling on, which has resulted in the picking up of a lot of business across the textiles space.
Most recent news from the company concerns an announcement regarding a new licensing agreement for its Morris & Co brand with Ruggable LLC, the US-based company that markets machine washable indoor and outdoor rugs and doormats and this serves to further enhance the US prospects.
The company should be providing a pre-close Trading Update early next month which will no doubt provide investors with further insight.
For now, Broker Singer expects full year 2023 revenue of £114.5m with adjusted pre-tax profit of £12.8m and adj EPS at £13.9p. The net cash position is also forecast by the Broker to stand at a very healthy year end figure of £17.5m.
This sees the stock trading on a single digit PER of little more than 8 with a dividend yielding around 3% as a supportive attraction and of course the strong cash position.
Looking back at the Interims, the results were actually around 12% ahead of expectations, with as mentioned earlier, strong margin performance, leading the Broker to more recently conclude. "Despite its unique strengths, competitive advantages and strong balance sheet, SDG trades at a 40% discount against a blend of peers, this looks completely anomalous".
Aside the economic uncertainties and headwinds, SDG boasts a diverse mix with some highly regarded and resilient brands, which should stand it in good stead in the coming years, making it for this writer at least, a stock well worth holding in my own diverse portfolio.
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