Good morning!

The Dow fell 800 points yesterday, or 3%. The FTSE dropped another 100 points to c. 7150. Let’s see what today brings.



H & T (LON:HAT) footnote

(I have a long position in HAT.)

I had a very brief chat yesterday with Richard Withers, the interim FD of H&T, to clarify one or two things I had been wondering about (see Tuesday's report for background info).

1. Fall in retail margin

H&T's retail division saw a 10% reduction in gross profits and a noticeable decline in margin, and I asked Richard why the company had chosen to get rid of aged items at such a large discount.

Richard explained that these items had been sitting in stores for "quite a while", including things like less desirable watches and gold bangles which were more difficult to sell.

From a financial efficiency point of view, £2 million of cash had been released by this move, and stock turn had improved from 52 weeks to 38 weeks.

Richard confirmed that there had been a gradual buildup of inventory and that this sort of inventory clearance was just something that might be needed from time to time - there is no overall change in the company's retail strategy.

My view - this makes perfect sense and I appreciated the focus on stock turn. H&T's quality metrics tend to be "good, not great" but managing inventory efficiently is the sort of thing that can help to keep them at acceptable levels:

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2. Low revenue growth in Pawnbroking

Pawnbroking revenue (less impairments) only increased by 4%, even though the gross pledge book grew by 12.5%. The risk-adjusted margin, which measures the profitability of the pledge book, fell from 67.9 to 62.9%.

Richard gave me some extra detail on this, explaining that there were more 14 carat and 22 carat items being pawned (with origins in Eastern Europe and Asia).

This business mix with more high-value items being pawned results in larger loans being made by H&T. And larger loans tend to have lower interest rates. This is why revenue didn't grow as fast as the pledge book, and the profit margin of the pledge book fell.

My view - I'm satisfied that this makes sense. Redemption rates were flat, so rising customer defaults are not…

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