The Works Tumbles After Slashing Forecasts for Fiscal 2023 on Rampant Inflation
2022.08.08 13:22
By Geoffrey Smith
Investing.com — The Works (LON:WRKS) became the latest U.K. retail stock to be trashed by a profit warning resulting from the sharp economic slowdown across the country Monday.
The Works shares fell as much as 34% in early trade in London to an 18-month low, before recovering a little to be down 24% by 06:00 AM ET (1100 GMT).
The seller of arts & crafts products, stationery, toys, and books warned that while it still expects sales to grow in the 12 months through next May, record low consumer confidence and rising inflation have forced the board to lower its profit expectations “materially”.
Like-for-like sales in the first quarter fell 2.5% from a year earlier, as the company struggled with the after-effects of a major cyber attack. The attack exaggerated a secular turn away from online shopping in recent months due to the relaxation of public health restrictions. Online sales were down 28% on the year, although they were still up 40% compared with pre-COVID levels.
The Works noted that the current factors hurting it such as high freight costs “are showing little sign of abating in the short term” and flagged the risk of rising labor costs through government-ordered increases in the National Living Wage. The government raised the NLW by 6.6% in its budget last October, but the issue has hardly figured in the Conservative Party’s ongoing leadership contest, with the final two candidates Rishi Sunak and Liz Truss, both prioritizing other issues.
The Works’ announcement is the latest shock to a U.K. retail sector where profit warnings have become a way of life this year, as inflation has surged to its highest in over 30 years. The Bank of England now forecasts five straight quarters of contraction beginning at the end of 2022. Earlier Monday, fashion group Joules (LON:JOUL) acknowledged it needed outside help to stop it from breaching its debt ceilings after a disastrous start to 2022. It confirmed it’s in talks for larger rival Next (LON:NXT) to take a big minority stake of around 30% for only 15 million pounds.
Despite the miserable outlook, the company said it still expects to pay its announced dividend for the fiscal 2022 year that ended in May. However, the pressure on its cash position means that it has agreed to increase its bank debt facility to 30 million pounds and extend it through November 2025, “providing significant additional liquidity headroom”.
