Richard Beddard has added Howdens Joinery to his Share Sleuth portfolio. I mention this because I’ve written a little about Howdens Joinery in the past. And some of you know Howdens is the stock I like best that I don’t yet own.
This raises the question:
Why haven’t I bought Howdens yet?
There are two reasons:
1. I try to buy stocks I’m confident I’d be willing to hold for more than 5 years if necessary
2. I try to simply hold cash till I’m confident a stock will return at least 10% a year while I hold it
I believe Howdens may – in about five years from now – have fully covered the U.K. with about as many depots as it ever will have in that country. I’m not 100% sure this is true. I’ve seen companies raise their estimates of the size of their chain’s footprint that their home country can support. So, Howdens may have more years of depot growth ahead of it beyond 2022.
But, there will eventually be a limit to how many depots Howdens can build in the U.K. So, the next question is:
Can Howdens expand to other countries?
Richard Beddard writes:
“The other risk is Howdens might fill the UK with depots within my 10-year scenario, in which case it would need to find some other way to grow. Due to its entrepreneurial culture and decade long experimentation with European stores, I think it probably will be able to adapt its business model and establish profitable stores abroad.”
I don’t doubt Howdens’s entrepreneurial culture. But, at the risk of ethnocentrism here (I am an American writing about a British company), I am not 100% certain that Howdens’s entrepreneurial culture will – at the depot level – be easily exportable to non-English speaking countries. I’ve researched a few organizations in the past – notably Tandy Leather (TLF) and Car-Mart (CRMT) – where scuttlebutt taught me the importance of delegation and incentivization of the branch managers.
I believe Howdens’s model depends heavily on good management at the depot level.
As a rule, English speaking countries tend to be among the most “flexible” when it comes to labor in the sense employers can easily fire workers with little cost. And, as a rule, continental European countries tend to be among the least flexible when it comes to labor.
In its 2015 annual report, the company said:
“Managers hire their own staff locally and develop relationships with local builders. They do their own marketing to existing and potential customers. They adjust their pricing to suit local conditions. Managers manage their own stock. They work out where to put everything they can sell – old favourites and new introductions. Every day, they balance the needs of builders, end-users, staff and everyone in their local area who has an interest in the success of their depot...Managers are in charge of their own margin, and effectively of their own business. Both managers and staff are strongly incentivised on a share of their local profit less any stock loss, which results in a common aim to improve service, and consequently profit, with virtually no stock loss.”
Howdens’s most recent annual report included this statement:
“We continue to investigate the opportunities for Howdens in Europe. At the end of 2016, we had twenty four depots outside the UK: twenty in France, two in Belgium, one in the Netherlands and one in Germany. We have been in mainland Europe for eleven years and continue to learn. We intend to thoroughly understand these markets before any decision is made to expand in them.”
The emphasis is mine. But, I think it’s reasonable to assume - from this statement and other little bits you can find in past annual reports - that the depot level economics are not as good in France as in the U.K.
Finally, the most recent annual report includes this passage:
“We give staff the opportunity to get substantial bonuses for exceptional performance. This has always been part of the Howdens business model and culture. Our people share in the profitability of their local site, as well as in the profitability of Howdens as a whole. In the words of some of our staff, the bonuses that they can achieve for exceptional performance in our peak trading period can be ‘life-changing’.”
As an American, I don’t know much about the differences between the U.K. and countries like France and Germany in regard to how low guaranteed pay can be and how big bonuses can be – nor how easy it is to fire people who don’t fit with your company’s “entrepreneurial” culture.
I’m not sure Howdens’s depot level culture can spread to other countries that easily. If I believed the model was easily repeatable in other countries – this might be my favorite stock of all (ahead of even the two I already own: BWX Technologies and Frost).
Instead, Howdens is on the bubble for me. I like the at least five year future I see in the U.K. And I can imagine the stock returning 10% a year for the next 5 years. I am less certain of the repeatability of growth beyond five years.
Does this mean I like Howdens less than Richard Beddard?
His Share Sleuth portfolio has a “meaningful position” definition of about 3% to 4% of the portfolio. For my personal portfolio, a normal position would start at around 20% of the portfolio. If I was considering whether or not to put something like 3% or 4% or 5% of my portfolio into Howdens – I’d have already made the decision to buy. Because I’m considering putting 20% of my portfolio into Howdens, I still haven’t made a decision.