Two must-reads, investors or not

Two great documents that should be in every investor’s reading pile were released this week. Actually, though, they’re better than that – they should be in the pile of anyone interested in how businesses operate and think.


The first is Next’s results statement, released Thursday. Next set the bar for how companies should report to their shareholders – forthright, clear and understandable. As you read more of the guff companies put out you begin to realise how rare it is to actually read an honest discussion of a company’s business.

There’s an excellent section, for instance, on the company’s lease portfolio. More and more commerce is shifting online. Footfall trends on high streets are not pretty. In this context, it is wholly legitimate as an investor to question how one should be thinking about a big lease portfolio like Next’s. In the good times, it is just another line in the operating expenses, like staff costs… but in bad times, onerous leases are a millstone. French Connection is the best example here – a company which is obliged to keep shelling out for stores that are losing money hand over fist. In this case, operating leases are really like a type of debt.

Lease obligations are exactly the type of issue that catch out investors, big and small. They are hidden in the footnotes to financial statements (for now!) and, again, in the good times their structure is essentially irrelevant. But at some point in the next twenty years there will be a downturn and leases will be a hot topic again instead of the source of blank stares. It will be obvious that companies with decade-long lease portfolios tied to a challenging market sector are loaded with risk. Why didn’t anyone see it sooner?

The fact that Next highlight it now – and show how they’ve thought about an adverse scenario – is exactly what I’m talking about when I say their reporting is forthright and honest. This is the sort of analysis every other retail company will be doing in four years’ time after their shareholders demand it. Next do it now and share the results.

Howden Joinery

The second must-read is Howden Joinery’s annual report, released on Wednesday.

As always, it is informative, easy-to-read, and enlightening. They list their competitive advantages up front on the first page:

And they go on to explain, in much more detail, why their model works. Local supply, local incentives & local service are the first three.

I also love a page later on in the annual report called ‘the value created by Howdens in 2016’. It shows what the business contributes to wider society: the wages paid to staff, the tax paid to government, the costs shelled out to suppliers further down the supply chain. I can’t think of a better way of showing how it all slots into the bigger picture.

Not very much in the annual report is new or novel, but it doesn’t need to be.

The very fact it is intelligible and shows some thought sets it apart from the majority of jargon-filled tomes released by publicly listed companies, big and small. For instance; compare Howdens to Capita:

This is the first page of both of their most recent annual reports.

I know which one makes me want to invest more.

4 Replies to “Two must-reads, investors or not”

  1. TomB

    Hi Lewis, thanks for the update.

    By chance, I am just doing some numbers on Howden Joinery. What I am seeing is, that from ~2007 onwards the cost of inventories in % of sales are declining steadily – a little less every year. Going from ~50% in 2007 to ~34% in 2016.

    Now it is nice to see the competitive advantages they describe, but what caught my eye in the 2016 report is that they self-produce about 1/3 of their sales. Do you know what percentage of sales they self-produced before 2016 (I could not find any information, only for 2016)? And could the declining inventory expenses be related to this self-production in some way?

    Thanks for your thoughts,

    • Lewis Robinson

      Hi Tom,

      Good to hear from you.

      It’s an excellent question. I have never thought about that before so don’t have an answer.

      What you say seems plausible. Perhaps, as kitchens have become more complicated, more of their sales are coming from the complicated gadgets they don’t produce?

      Also note that CoGS has fallen from 53.3% in 2007 to 35.8% last year. So a large portion of the reduction of cost of inventories as % of sales will come mathematically from the fact they now have a larger ‘gross margin component’ of every £1 they sold.

      I will ask them if I see them!


  2. Amiable Minotaur

    Hi Lewis, enjoyed your thoughts on Next! (and the blog in general) What a brilliant set of capital managers they are. Any opinion on the value of the company at this point? Seems cheap to me but always interested in what i am missing…

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