IG Design Group (ticker: IGR)

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  • #5401
    Nick Hargrave

    I have been working on IG Design as the next published investment idea – the preliminary thesis is that it’s a ‘simple’ product with sustainable revenue drivers and the turnaround is likely to be successful, leaving the share price undervalued if they achieve even modest success. We have a due diligence call organised with the new CEO and CFO on 5-Sep-23 and, subject to what we learn, will aim to finalise our next memo shortly thereafter.

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    • #5463
      Nick Hargrave

      I have just had the call with the CEO (Paul Bal) and CFO (Rohan Cummings) which has broadly confirmed the thesis and our assumptions. We will be publishing the new memo shortly but provide some additional colour and detail below outside of the standard format.

      Management came across as very credible with backgrounds in ‘big’ companies and then senior positions in UK listed companies – BAT (British American Tobacco) and Stock Spirits plc in Paul’s case and SAB Miller and Devro plc for Rohan. Paul gave such a comprehensive background to the business that he almost answered every question I had without me having to ask any questions. Paul knew of the business after being considered for a NED role in Aug-21 and eventually agreed to take on the CEO role after being approached by the new chairman (following 2 profit warnings) and concluding the business was ‘fixable’.

      He believes the biggest challenge is stop history repeating itself. What happened in 2021 had happened in 2007. Paul is just the 3rd CEO of the company following the founder (Anders Hedlund) and Paul Fineman, both of whom were from entrepreneurial backgrounds. The company started out as just gift wrap and then product lines had been expanded through acquisitions, bringing a mix of manufacturing and outsourcing business models. These businesses have never been integrated and the pandemic left them particularly exposed in the US.

      While the breadth of their assortment got them through COVID i.e. stationary up as people established home offices and craft and creative play increased. Then there was the post COVID rush to normality where supply chains were overwhelmed. The company’s value proposition is focused on never letting customers’ down and suddenly they couldn’t get the boats for their supply with the China to US West Coast route a key constraint. With the US more exposed to sourcing product the business witnessed containers costing $2.5k with freight representing 4% of sales go up to a peak of $25k and freight becoming 9% of sales. With huge pressure to deliver for customer in an already tight labour market they needed to pay premium rates to ensure they met customer demand.

      Businesses outside the US are smaller and simpler and their managers were quickly onto the evolving situation and were able to negotiate pricing with customers. Disparate systems and slow information flow in the US meant they didn’t see the problem fast enough and were not able to discuss pricing with customers. This is symptomatic of the group with each individual business having their own systems, processes, design teams and supply chain. As an example, the group employs 140 people in China to manage their suppliers – there is no unified procurement.

      The internal issues are, therefore, identified and fixable. The external piece is the group, along with its key competitors (American Greetings and Hallmmark) collectively eroding the value of their categories. IGR’s cheapest single card, for example, retails at 29p in B&M. Small ‘disruptors’ designing their own cards (and sourcing them from China) are selling cards at £5. Much lower volume of course, but highlighting that the opportunity isn’t just in the race to the bottom. Tesco acquired the Paperchase name and aim to create a premium range that IGR can benefit from. There are also opportunities for better control over merchandising.

      That is not to say that there aren’t some market challenges with UK demand softening more than other markets given the current cost of living issues. Gift wrap volumes are slowly declining overall, but on the other hand demand for bags has been exponential – it’s easier to drop a present in a bag than wrap it and add a bow and ribbon.

      In summary, our thesis was that the business has sustainable growth potential and the US issues were internal mis-steps to market conditions and fixable rather than a demand driven decline. The discussion with management has validated this belief and they clearly have plans in place to successfully reorganise the business. Their margin target (getting back to pre-COVID levels) was designed to provide wiggle room. Pre the CSS acquisition margins were 6%, but PF (pro forma) for CSS they were 4.5%. They are focused on chasing the 6% rather than settling for 4.5%.

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