In my previous post on Walker Greenbank, I made some slight mistakes about the business model that were pointed out to me, shortly after the post was published by WGB’s PR firm. The most important of these mistakes is my suggestion that the company sold its products directly through its own stores and that these stores comprised the majority of the company’s operating leases. WGB sells its products through other retailers which can be large department stores (such as John Lewis) or smaller interior design stores. For overseas distribution, agents and distributors are also employed.
The company does have showrooms which it leases (a point which perhaps confused my orginal analysis) but retail sales are not made through these stores. The remainder of the operating leases are for head office, admin, the warehouse and related functions but not for retail sales. The manufacturing sites are freehold.
This obviously raises something of a question around my adjustments for these leases to bring them onto the income statement and balance sheet. My feeling is that the treatment is still generally right as the adjustment only seeks to work out the PV of those obligations. In addition, I should highlight that the adjustment for operating leases explains the large difference between net debt as given in the company balance sheet and what appears in the images attached to the post.
Another relevant point which I missed is that the turnaround since 2004, that I note in my previous post, could be credited to the current chief executive John Sach who took on the post in May 2004.
Whilst this is a somewhat significant change in the “story” for WGB, I still feel the same way about the numbers. The increase in admin costs is worrying and looking at what has been priced in by analysts/the market buying at this price doesn’t provide enough margin of safety. Its fairly clear that the company could compound book value at around 15%, given the current P/B, if costs improve only slightly however, the trends signal there is too much uncertainty to bet on this whilst the market is already priced in for this slight improvement which may not emerge.
