Against an unfavorable macroeconomic backdrop and following recent poor results from rival ScS, Land of Leather's end of year financials are particularly impressive. With a clear value focus and ample scope for further expansion, the company should continue to outperform.
The impressive results were driven largely by new space, both through store openings and mezzanine installations, with like-for-like sales just 0.3% higher. For retailers with more mature store estates such a skew towards space driving sales could be worrying, but with Land of Leather only operating 103 stores in the UK and Ireland there is huge potential for further growth through physical expansion. Indeed, having achieved higher than expected turnover from recent store openings and reduced fit-out costs, the company has raised its store target from 140 in 2012 to 160 in 2013.
Meeting the higher store target has been made easier by the easy availability of second hand units on retail parks with Focus and MFI both closing surplus stores and downsizing units. Land of Leather has already acquired stores from collapsed rival Klaussner. The glut of space on retail parks also means that the company is in a stronger negotiating position with landlords - able to contain rises at rent reviews and achieve early break clauses in leases.
The most impressive aspect of the company's results is a 200 basis point gain in gross margin, due primarily to improved sourcing from the Far East, with Land of Leather's increasing scale strengthening its negotiating position with suppliers. This is despite a continuing emphasis on low entry-level prices and high profile promotions, a strategy that is serving the company well at a time when consumers are feeling the pinch from higher interest rates.
With the business performing strongly in a difficult trading climate, Land of Leather is right not to deviate from a successful formula. The key risk to the business is of leather upholstery going out of fashion, but the company is confident that leather sofas will continue to be viewed as aspirational products by its price conscious customer base, particularly given leather's other advantages, such as durability and ease of cleaning. Longer term, the company may need to modify its business model as it approaches geographical maturity and broaden its appeal to more affluent shoppers, but for the time being there is no reason for it to deviate from its proven strategy.
Source: Verdict Research