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Sep 28, 2020
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Brand Architekts swings to loss on tariff issues and lockdowns

Sep 28, 2020

Brand Architects reported its final results for the year to June on Monday and it made a small underlying loss after having previously been profitable.

Brand Architekts

The personal care and beauty products group said it lost £0.8 million in FY20 after making £4.4 million in FY19, but having divested its contract manufacturing business for £35 million to focus on its brands, it made an underlying profit from continuing operations of £0.1 million, which was down from £2.4 million. 

That came as revenue declined sharply to £23.7 million from £77.3 million a year earlier. However, looking at continuing operations, while revenues were still down, the fall to £16.3 million from £19.7 million was less severe. The company made a pre-tax profit of £2.2 million (down from £4.1 million) on a reported basis, but a pre-tax loss on continuing operations of £4.3 million, down from a profit of £1.8 million a year ago.

Looking only at its continuing operations, it means that UK sales were down 16%, driven by low consumer confidence and pressure within the retail environment, plus the impact of store closures as a result of the outbreak of Covid-19.

International sales declined by 24% following the impact of currency devaluation in Turkey, the effect of increased tariffs on cosmetics shipped from China to the US and the pandemic effect across several of its markets.

As well as exiting contract manufacturing, the firm also appointed a new executive team “to build scale and deliver further profitable growth”. And the key member of this new team, CEO Quentin Higham, took an upbeat stance on Monday. “I believe we now have the right strategy to deliver sustainable, profitable growth over the coming years,” he said.

And Roger McDowell, incoming Non-Executive Chairman, said the  financial year was one of transformation for the group, “while presenting both opportunities and challenges in equal measure”.

Net sales in the first half had declined 15% but in the second half they dropped 21% as the pandemic hit. 

Sales weren’t only affected by lockdowns though. Following the heavy impact of currency devaluation in Turkey and the effect of increased tariffs on cosmetic goods shipped from China to the US, international sales declined by 24%. Looking forward, “should the tariffs be reversed, the board believes that the group is well placed to recover a large proportion of the affected USA business”.

As mentioned, UK sales fell 16%. This was despite “encouraging volume growth” across its three 'drive' brands, two of which were relaunched in the period. The decline was largely due to one significant customer, however, “overall low consumer confidence and pressure within the retail environment resulted in a reduction of both category space and the effectiveness of promotional activity”.

The gross profit margin plummeted to 19.6% from 35.6% but the underlying gross profit margin (which excludes exceptional inventory provisions and write-offs made at year-end) was a more palatable 35.2%. With the firm’s transformation to an owned brands model now complete, “margins are expected to normalise” in the current year.

While the changes that have happened to the company in the last year make it hard to get a clear view of the firm’s performance, the company held up reasonably well in the face of Covid-19.

Its overall sales performance during H2 was stronger than it had anticipated but it wasn’t immune during Q4.

Its brands' performance within UK grocers showed single-digit growth, while its online sales channels, whether through large e-tailers such as Amazon or its own branded websites, delivered high-double-digit growth. As a result of the shift to online it stepped up promotional activity to capitalise on this route to market.

But the gains didn’t offset the significant decline in other high street outlets, whose store traffic was impacted during lockdown. Additionally, several key international markets placed no orders during Q4 due to the closure of most general merchandise and department stores.

Unsurprisingly, sales of handcare products increased significantly. But it was also no surprise that sales of male grooming products saw a major decline.

And its expectations for the current financial year? It said “the difficult trading conditions remain and the impact on the high street in particular is uncertain”. Retailers are being cautious with their Christmas orders and agreed volumes are down on last year both domestically and internationally.

But the company has a “strong balance sheet with significant positive cash” and is accelerating its strategy to develop and invest in online sales.

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