Freddie George Comments: Carpetright bounces despite fragile revival

December 16, 2014, Financial Times

Shares in Carpetright jumped 12 per cent on Monday despite a warning from the carpet specialist that a slowdown in property sales growth in the UK and economic uncertainty in the rest of Europe could hurt consumer spending.
The company voiced concerns over the outlook as it reported a 250 per cent rise in pre-tax profit to £6.7m on a sales increase of 2.6 cent to £227.9m in the six months to October 25.

However, the struggling retailer said the results were “a line in the sand” as it laid out further plans to revive its fortunes.
“No-one is going to get too giddy because the macroeconomics are still fairly fragile, but I think it is a good first base,” said Wilf Walsh, chief executive.

Shares were up 11.9 per cent at 350.5p in afternoon trading even though the company said it would not pay an interim dividend due to “uncertainty in the retail environment”.
Mr Walsh said that, despite concerns over the outlook, he expected full-year results to meet analysts’ estimates as the company returned to profit in Europe and reported like-for-like sales growth of 6.5 per cent in the UK.
“Having made a solid start to the year, we now expect full-year underlying pre-tax profits to be towards the upper end of current market expectations,” he said.

Mr Walsh, who joined in July, said the company would be trialling new ranges and services to turn its fortunes around, including offers of interest-free credit to customers and launching new premium high street outlets.

The results received a mixed response from analysts. In the UK, where the majority of its stores are based, the company still had a lot of work to do to revitalise and reduce its store portfolio, said Freddie George, analyst at Cantor Fitzgerald.
“The figures were better than expected but the upgrades are predominantly coming through because of Europe and interest costs,” he said.

But David O’Brien, analyst at Shore Capital, said the results were a sign of further improvement to come. “The new strategy will take the growth we have seen in the first half and improve on it. Profitability should continue to improve from here.”
Carpetright reported a return to operating profit in Europe, where it has 139 stores, and made £0.1m in the first half. Sales fell but it increased gross margins thanks to better prices from suppliers and cost cuts.

Reported sales in the UK rose 5 per cent to £194.2m as the group discounted to attract customers, but gross margins in its domestic market fell 140 basis points to 61.7 per cent. It closed nine stores in the UK during the period.
The company moved from a net debt to a positive cash position, ending the period up £17.5m at £3.2m.

The retailer aims to further lower fixed costs. During the next five years almost 30 per cent of its outlet leases come up for renewal, which it plans to use as leverage to lower rent. During the half year it achieved average rent reduction at lease renewal of more than 10 per cent, it said.

Carpetright has struggled in recent years, having suffered a string of profit warnings and the sudden departure of its chief executive last year. Shares were down 40 per cent this year before trading opened on Monday. Its founder, Lord Harris, retired as chairman in October.