Marks Electrical Group PLC (LON:MRK)

Marks Electrical Group plc (LON: MRK), referred to as “Marks” for the remainer of this writeup, is a high return on capital online retailer that sells major domestic appliances (MDAs) and consumer electronics (CE) in the United Kingdom. The business generated revenues of £114,000,000 in FY 2024 and is located in the mean streets of Leicester, England.

History/CEO

I made the decision to merge these two sections because Marks’ history is tied to that of its founder Mark Smithson, who has quite literally built the business from zero.

He started out in 1987 while studying to be a surveyor. He stated in this video that he would go out around town after work buying used cookers, fixing/cleaning them up, and then flipping them to buyers in the local papers. Those cookers eventually turned into MDAs and he was able to open retail stores in the Midlands region of England. Per its Admission Document, linked here, Marks’ initial catalog was only 20 products. Growth ensued and the business launched its website in 2003. It followed that up by purchasing two warehouses in 2005 which gave the business ~13,000 sq/ft of space. 2006 saw online sales reach 80% of total revenue.

Continued growth and the occasional financial crisis shepherded Marks to where it is today. It has shed its retail locations and operates exclusively online. Marks now boasts 4,500 SKUs, 200,000+ sq/ft of warehouse space, 285 employees, and revenues of £100,000,000+. The business went public on November 5, 2021.

CEO Compensation

Mr. Smithson’s compensation is composed primarily of two elements: base salary and an annual incentive plan. There is a third element, a long-term incentive plan, but the CEO is not granted these awards due to the size of his shareholding in the business.

Base Salary

Mr. Smithson’s base salary for FY 2022 was £201,517. His salary for FY 2023 was £300,000 and increased by 2% to £306,000 for FY 2024. His salary will remain at £306,000 for FY 2025.

Annual Incentive Plan

The annual incentive plan is a cash bonus award set at a maximum of 100% of the CEO’s salary for the year. Per p. 66 of the FY 2022 Annual Report, 50% of the bonus is based on revenue targets and the other 50% is based on adjusted-EBITDA targets. These targets were unchanged for FY 2022, FY 2023, FY 2024, and will remain in place for FY 2025, which was surprising considering that the business has not achieved them for years. Usually the remuneration/compensation committees have no problem moving the goalposts if executives don’t achieve their bonus targets, but that hasn’t happened at Marks so kudos to them.

P. 68 of the same document unsurprisingly grants the Remuneration Committee a lot of leeway in changing the performance metrics of the annual incentive plan, “Performance metrics and their respective weightings may vary from year to year depending on financial and strategic priorities.

The Committee may adjust the formulaic outcome of the bonus if it considers for example, that it is not representative of the underlying performance of the Company, investor experience or employee reward outcome.”

Previous readers of the Possible Value Research newsletter will know that I’m not a huge fan of anything related to “adjusted-EBITDA”. I’m immediately skeptical anytime I see it printed or discussed and this time is no different. There are much more effective performance metrics available to the Remuneration Committee such as growth in free cash flow, organic growth, ROIIC above 15%, compounded increases in operating or net income, high gross margins, etc. We know what the metrics are, but they aren’t being used here and that’s not something I want to see as a potential shareholder.

The Summary Compensation table for the last two fiscal years is shown below. The screencap was taken from p. 74 of the FY 2024 Annual Report.

One thing Marks does not lack is a CEO with skin in the game. Per TIKR, he owns 73.6% of the business. An intriguing tidbit is that each employee, at the time of IPO, was given 2,727 shares. I know that only equates to ~ £3000 at the time of IPO, but it counts and is a great way to motivate employees and align the overall business interests with those of shareholders.

There have been questions about Mr. Smithson selling part of his stake or taking the business private due to the downturn in stock performance. His answers to these concerns start at the 53:00 mark in the FY 2023 Investor Presentation video, linked here. The TL; DR is that he has no plans to sell his business or take it private, but he will not start selling his shares until the stock gets back to or above its IPO price of £1.10.

What Does Marks Do?

To remind you, Marks is an online retailer that focuses on selling premium brands of MDAs and CEs in the United Kingdom. Interestingly, the business generates a significant number of sales via telephone. Per the FY 2023 Annual Report, 25% of sales (£24.45 million) generated during the year were from telephone sales. I was unable to find what telephone sales were for FY 2024.

The appliances Marks offers include laundry machines, dryers, range cookers, hoods, ovens, microwaves, dishwashers, and refrigerators.

Side note - Marks sells a product line of fridges called “American Fridge Freezers” which I didn’t know were a thing. Apparently, the standard size of refrigerators here in the U.S. of A. are a lot bigger than those in Europe. A quick Google search indicated that most of the difference in size was due to the amount of space available in homes for larger refrigerators and cultural differences.

Other appliances offered by Marks include vacuums, freezers, irons, air conditioners, dehumidifiers, BBQs, smokers, and pizza ovens.

The consumer electronics available at Marks include televisions, projectors, gaming systems, audio, and home cinema equipment.

Orders of £399 or more placed before 6PM are delivered the next day, at no additional charge, as long as the item is in stock. Orders for less than this amount are charged a fee of £9.99.  In addition to delivery, Marks offers a vast array of installation services. It even offers a service to recycle the appliance that is being replaced although this generates a negligible amount of revenue for the overall business.

The screencaps below show Marks’ full installation offering. They were taken from Marks’ main website and can be found here.

More than 50 premium brands are available across Marks’ catalog. These include AEG, Belling, Bosch, Dyson, Fisher & Paykel, Liebherr, Miele, and Samsung. A full list of brands offered by Marks can be found here. Per its FY 2024 Investor Presentation, the business offers 4,500 SKUs and more than 40,000 products in-stock across its entire offering which is a hell of a jump from its original offering of 20 total products. Management has stated the number of SKUs isn’t set and that they won’t add more just to increase the size of the catalog or market share. Marks seeks only to have those brands/products/SKUs which are both premium and can be sold profitably. The screencap below from slide 18 of the FY 2023 Investor Presentation, linked here, provides further insight into sales by product category and brand. Unfortunately, this slide was not updated for the FY 2024 Investor Presentation.

These premium brands have resulted in higher average order values for Marks. Per p. 20 of its Admission Document, “For instance, in FY21 within the Cooking product category, the average price of products sold by the Group was 81 per cent. higher than that of the UK MDA market average for cooking products. Substantial premiums were also achieved within Dishwashers (57 per cent.), Refrigeration (79 per cent.) and Washers & Dryers (45 per cent.) and with similar trends also being achieved across the same categories in FY22 to date.” To be fair, Marks has not commented on what their pricing premiums have been in any public documents or videos that I’ve come across since the Admission Document was published besides a quick mention on p. 5 of the 2023 Annual Report that stated, “Our strong partnerships with a wide range of premium brands, combined with our focus on high-end products and services, enables us to deliver not only an exceptional customer offering, but also higher average order value, in turn supporting the superior margin profile of the business.”

What Is Unique About Marks?

Besides its premium product offering, free next day delivery, and installation services, and higher average order value, Marks differentiates itself in several other ways. They include its online focus and what the business calls its “four growth pillars” which is comprised of its customer proposition, brand, operational capacity, and financial performance. The last of these pillars will be discussed in the Valuation section of this writeup.

Online focus

You may have picked up on this already, but the first unique feature that Marks possesses is that it does not have a physical retail footprint. All its sales are generated online or via telephone orders. Its competitors, notably John Lewis and Curry’s, have a substantial physical presence. AO is another competitor which operates online, but it does not focus exclusively on the “premium segment” of the MDA and CE markets. I learned about these competitors from a series of research reports by Equity Development, a UK based investor relations and research firm. The reports can be found here. Besides saving money on rent and training/retaining store employees, this allows the business to focus solely on its online offering.

Marks has its own IT staff that is responsible for maintaining and updating its website which runs on AWS. It also has its own pricing tool and inventory management system.

Per its Admission Document, the pricing tool is “… an automated, in house developed pricing tracker which tracks market prices and reacts rapidly to opportunities or issues. The Pricing Tool combines external data, automatically imported multiple times per day, containing current prices and stock availability, with the Group’s own internal pricing and stock levels from the Everest ERP application. This provides a high-level overview of the overall market position down to the individual stock line level. The system enables the Group to choose either manual or automated pricing based on brand, product category or individual product segments. The automated mode uses algorithms to constantly adjust pricing based on user-defined rules, including competitor prices, competitor availability, the Group’s stock levels and margins. Manual control can also be employed which is useful for new line items or in anticipating seasonal demand. The Pricing Tool software has been developed and finessed in house over a period of twelve years, with significant IP created.”

Per the same document, its inventory management tool is called Picklist. It is described as follows, “The Group operates a bespoke stock management system which optimises logistics and stock control. The Picklist software controls stock picking, loading and tracking of deliveries and also provides delivery dates to the website and telesales staff based on current logistical capacity and demand levels. The software is fully integrated with third party services MaxOptra, for route planning and optimisation, as well as updating customers on delivery status, and Mzone, for live fleet management and GPS tracking. In the Group’s warehouse, Android-powered PDAs with barcode scanners run the Picklist stock control app. Over time, the system has developed to cover additional functions including the scanning in of stock shipments, real time stock movements, stock checking (manually and automatically based on spot checks) and full stock takes.”

Customer proposition

You would only need to take a glance at Marks’ Trustpilot rating to get a read on how effective its customer proposition is. It currently stands at 4.8/5 stars with more than 77,000 reviews. The business also receives high ratings and reviews on Feefo and review.io which can be found here and here. Marks goes as far as having a dedicated page to the service awards it has received over the years. These highly rated reviews sound great, but what’s driving them?

Central to this is Mark’s location. It is headquartered in Leicester, England near the M1 motorway (“expressway” or “freeway” for us Americans) which gives the business efficient access to a majority of the UK population. In fact, it allows Marks to do next-day delivery to 90% of the UK population if the item is £399 or more, is in stock, and ordered before 6 PM. The same benefit applies to its installation service which allows 70% of the UK population to be served on a next-day basis.

Another key feature of Marks customer proposition is that its deliveries and installations, besides what it deems as “small items”, are done in house. The “small items” are delivered via couriers for a fee. Per the 2024 Annual Report, Marks had a fleet of 60+ vehicles. To service these vehicles, Marks has its own fuel depot and mechanics on staff to perform maintenance and keep the fleet running. Management decided to bring these functions mostly in-house due to issues with third party delivery services and installers.  85% of all orders in FY 2024 were delivered by in-house delivery teams. Per the FY 2024 Annual Report, 20,000+ gas, electrical, integrated, and TV installations were performed during the year. These were up from 8,000 installations in FY 2023. To improve its customer proposition further, Marks developed the “ME Academy” in FY 2024 which is a purpose-built facility to train its drivers and installers on improving and raising the standard of deliveries and installation to its customers.

I found a surprising bit of information in the Admission Document about how Marks incentivizes its drivers. Per p. 18 of the document, “Drivers are paid competitively and are further incentivized to deliver high quality service through a commission programme, earning extra remuneration for good reviews, handling larger freight, two-man deliveries and delivering up multiple flights of stairs, together with installation and removal of old appliances. Drivers qualified to drive Class C vehicles are paid a higher hourly rate than those without Class C licences. All drivers complete three months of driving and installation training to ensure the team is skilled and fully trained. Two transport managers have recently been added to manage optimal routing, driver selection and recruitment, to monitor and assess driving quality across the team, and to improve driver performance. Non-Class C drivers also have the opportunity to receive training and to progress to a Class C certification which allows them to drive a wider range of the Group’s fleet and improves their compensation. Due to the Group’s operating model, it has not, to date, experienced a shortage of drivers reported by other organisations, particularly in relation to a shortage of Heavy Goods Vehicles drivers.”

Brand

Marks has invested heavily in marketing since its IPO. Per its Admission Document, Marks conducted a survey that indicated that only 6% of the UK adult population knew about the business at the time. The business now advertises on TV, radio, on its trucks, and through social media and spends roughly 5% of revenues on all advertising and marketing. Marks is even an official community partner of the mighty Leicester City Football Club. This influx of spending on advertising and marketing has driven substantial growth, 2.5x in fact, in Marks brand awareness throughout England, particularly in London, as evidenced by the screencap below from slide 20 the FY 2023 Investor Presentation. This slide was not updated in the FY 2024 Investor Presentation, so this is the most up to date information I have.

Operational capacity

Deliveries aren’t the only thing Marks does in-house. Every piece of the business operates from its headquarters in Leicester which features a 245,000+ sq/ft warehouse. This offers a few more advantages in addition to the ones mentioned above. Again, it allows the business to focus solely on online retailing from one location. It does not have to worry about inventory or personnel at a warehouse in Liverpool, Birmingham, London, Manchester, etc. which saves money on overhead. A related advantage is that Marks can address any business issue almost immediately and does not have to waste management’s time and money waiting or going to an offsite location to fix a problem. A third advantage is that the warehouse is staffed around the clock, which allows vans that are coming back for the night to be loaded and ready for the next morning’s deliveries.

An update on its operational capacity was given in its HY 2024 Report where it stated that, “In H1-24, we completed significant enhancements to our warehouse and distribution centre. We invested in improved racking and very narrow aisle (VNA) systems, optimising capacity and expediting order picking. Additionally, we increased our loading and unloading capacity by introducing new dock levellers. These levellers allow for efficient rear unloading of HGVs, substantially reducing unloading times, and increasing our stock throughput capacity for outbound loading.

We developed our in-house vehicle maintenance centre by acquiring new equipment and expanding our team, resulting in increased vehicle availability and reduced fleet downtime, with fewer vehicles off-site for extended periods.

We increased our delivery capacity by adding 20 new vehicles, supporting the rapid growth of our installation team. Additional delivery vehicles are scheduled for delivery in H2-24, further enhancing our delivery capacity and demonstrating our confidence in the growth opportunities ahead.”

The constant increases in the efficiency of its operational capacity allow the business to generate more and more revenue each year from its single location in Leicester. Per the 2023 Investor Presentation video linked above, Mark Smithson believes that the organization can generate ~£250,000,000 from the site before it has to think about moving. The FY 2024 Annual Report updated this figure to £200,000,000+ which is a slight downgrade, but still allows the business to almost double revenue before it has to address its capacity issues.

Valuation

Marks’ fourth growth pillar, financial performance, will be addressed in this section. My data source was TIKR.

Revenue

Mark’s revenue growth from FY 2019 – FY 2024 is shown in the screencap below.

The business has been able to CAGR its revenue by 24+% per year since FY 2019, but only by 12.39% per year since FY 2022 which is the closest data point post IPO. Mark’s trades at 0.65x FY 2024 revenue given its current market cap of ~£74 million. I think that is the cheapest revenue multiple of any business that I’ve analyzed to date.

Free Cash Flow

Mark’s real free cash flow (RFCF) is shown in the screencap below.

Negative RFCF isn’t what I want to see as a potential investor in the business, so let’s look at what happened in FY 2024.

The business was doing a great job of generating RFCF until FY 2024 when earnings were crushed due to a tough trading environment for the year. Revenues increased 16.9% to £114,000,000, but the business was hit with a triple threat of materially higher costs of goods sold, distribution costs, and administrative expenses. Gross profits increased 8.8% to £29 million, but gross margins decreased to 25.4% from 27.3% in FY 2023 due to “a trade-down into less premium products where our rebate structures were not as favorable.”

Administrative expenses increased due to wages/salaries increasing 28.3% to £10,609,000 from £8,269,000 in FY 2023 and £2.7 million in additional administrative costs due to its new Microsoft ERP system.

Per p .37 of the FY 2024 Annual Report, distribution costs increased 53% due to:

• Decreased average order value leading to the requirement to deliver more for less revenue per order

• Increase in driver pay and reward to remain competitive in the current inflationary environment; and

• Full year of in-house installation services which provides added value to customers with significantly shorter waiting times and improved service delivery, but comes at a higher cost of fulfilment

Per p. 36 of the FY 2024 Annual Report, “Statutory operating profit was to £0.5m down from £6.4m in 2023. The primary reason for the decrease in operating profit was lower trading profitability as well as the impact of the costs incurred to replace our legacy enterprise resourcing planning system with Microsoft Dynamics 365.” Net income also plummeted to a measly £0.43 million.

Capital Structure

Mark’s balance sheet is shown in the two screencaps below. The first shows the asset side and the second shows the liabilities and equity side.

The asset side of the balance sheet is pretty clean. The only possible concerns arise with its receivables and inventory.

The former increased by more than £6 million in FY 2024. I went digging through the FY 2024 Annual Report and found out that Marks is due a rebate of more than £2,000,000 from a buying group that it left during the year. The full amount should be paid out by the end of FY 2025. There was also a note regarding its receivables on p. 102 of the FY 2024 Annual Report which gave further insight into the matter. It states, “Included within trade and other receivables are rebates receivable of £4,924,000 (2023: £3,196,000), buying group rebates receivable of £2,073,000 (2023: £1,716,000), trade debtors of £1,256,000 (2023: £69,000) and other debtors of £559,000 (2023: £103,000).”

Inventories are up 2.7x since FY 2019, but haven’t increased substantially since the business went public, so I don’t think they’re too concerning for now. I won’t be surprised if inventories fluctuate a bit over the next year or so since Marks is now negotiating and managing its own inventory relationships after it left the buying group it was a part of.

The only concern I see on the liabilities and equity side is with accounts payable which are up more than 5x since FY 2019. While payables have increased more than revenue since FY 2019 and since Mark’s went public, I don’t think it merits a full red flag for now. Accounts payable can increase for reasons both good and bad, but I do think it’s worth keeping an eye on.

Returns On Invested Capital (ROIC)

Mark’s returns on invested capital (ROIC) are shown in the screencap below.

Like its RFCF, ROIC was crushed in FY2024 for the same reasons mentioned above. Besides that, Marks achieved stellar ROIC since FY 2019 with its only down year (FY 2020) being in the throes of COVID.

Returns On Incremental Invested Capital (ROIIC)

Marks ROIIC is shown in the screencap below.

Marks doesn’t look too hot from a ROIIC perspective. Management has been destroying value by my calculations, but I don’t think that’s a fair way to assess the business. What my calculations do show are the limitations of ROIIC and how much one bad year can skew its results.

Let’s look at Marks ROIIC from FY 2019 – FY 2023, shown in the screencap below, to get a bit more perspective.

These results tell an entirely different story and indicate that Marks was compounding its value somewhere between 21% - 22% per year since FY 2019. Do we really think that Marks has suddenly gone from compounding its value at a world class rate to destroying it in 12 months? I think the answer lies somewhere in the middle. These results, coupled with those above, paint an interesting picture of what Marks is dealing with. It’s operating in a pretty dynamic market that can change rapidly which is something I didn’t consider before running these calculations. Marks is anchored to the purchasing power and economic prosperity of UK residents.

Marks stock price performance since it IPO’d is shown in the screencap below.

Marks stock price performance is more in line with my ROIIC calculations from FY 2019 – FY 2024 which I think is reasonable considering earnings were down more than 90% in FY 2024. It’s not a “left for dead” price, but the market doesn’t appear to be bullish on Marks’ prospects for now.

Risks

Marks’ website and platform – This is the only risk that I came across in the annual reports that deserves further mentioning. Given that 75% of all orders come from its website, which runs on AWS, Marks is heavily reliant on its IT staff and Amazon. The business seems exceptionally vulnerable to cyber-attacks or any other kind of disruption in service.

The £500,000,000 question – Mark Smithson mentioned growing the business to £500,000,000 in sales in both the 2023 Investor Presentation and London Stock Exchange videos linked above. My concern is what is beyond that? The business generated more than £100,000,000 in FY 2024, so there is still a while for it to grow before hitting that threshold, but it will approach or breach it in the next several years.

The size of the premium MDA and CE space – The CEO and CFO were both asked about Marks’ share of the premium segment of the overall MDA and CE market in the UK at the 45:00 mark of the 2023 Investor Presentation video linked above. To summarize, the CFO stated that they don’t have precise data on Marks’ share of the premium segment because it’s difficult to disaggregate the information and their interpretation of a “premium” product could be seen as different by competitors or potential customers in the market. The concern here relates somewhat to the previous one in that the “premium” segment means the higher end, cream of the crop portion of the market. Does that mean the top 10% of the market, 20%, 25%, 30%? Is £500,000,000 the amount of revenue that will encapsulate Marks’ entire share of the premium segment of the MDA and CE? I just don’t know.

Tailwinds

The size of the combined MDA and CE markets – Per its HY 2024 Report, Marks estimated the combined size of the MDA and CE markets to be worth ~£7,000,000,000. Even if you assume the MDA market won’t grow or will slightly decline over the next several years, the runway for revenue growth seems vast and will allow Marks to keep gobbling up market share.

Growth in MDA and CE market share – Per p. 16 of its Admission Document, Marks’ MDA market share was 0.41% in 2014. Per its FY 2024 Investor Presentation, Marks stated that it has 2.8% of the overall MDA market, 0.5% of the CE market, 5.3% of the online MDA market, and 0.8% of the online CE market. The screencap below from slide 5 of the presentation highlights the gains the business has achieved.

Marks’ survival – Numbers can only tell so much, but I think Marks’ survival deserves mentioning. Mark Smithson doesn’t get enough credit for starting the business from zero and growing it to £100,000,000+ in revenue. How many issues, problems, financial crises, geopolitical issues, natural disasters, Brexits, etc. has the business had to deal with and yet it remains? It just plugs away and grows year after year. This combined with the slide below from the 2024 Investor Presentation point to what I’m talking about…

… which is that Marks has clearly figured out something that works and is able to roll with the punches. That’s not to say that it will survive in perpetuity. There’s always problems or other competitors coming for your spot, but I think Marks is resilient and a tough business to crack.

Conclusion

I wanted my analysis on Marks to work out better. It’s a simple business that focuses on blocking and tackling that isn’t out here trying to change the world. It’s ROIC and ROIIC until FY 2024 were elite and its current valuation of 0.65x revenue is enticing, but the business is too tied to the UK consumer which is a macro issue that I have a minimal chance of figuring out. Who knows when customers across the pond will start to open their wallet and spend more on higher end appliances and consumer electronics? I do think Marks, given its resiliency, will be there to serve them, but until then I’ll have to unfortunately pass on the business.

Thanks again as always for reading. If you liked this writeup, please feel free to share it and subscribe!

Please reach out to me at possiblevalueresearch@gmail.com, @PossibleValue on Twitter and @Heshy on MicroCapClub with any comments, concerns or questions. Lastly, don’t forget to tell someone that you love them.

*** Remember that this isn’t investing advice. Consult a trusted financial or investment advisor before making any kind of investment decision. ***

Disclosure: I do not own shares in Marks Electrical Group PLC.