Carpetright laid bare

The horrific housing downturn of 2008 and 2009 put a serious dent in sales and profits at the UK's largest flooring retailer, Carpetright, as fewer people moved house or spent money on their homes. Sales fell 7 per cent to £483m between 2008 and 2009, and because the business has such high fixed costs – paying higher rents than, say, Topps Tiles or Galiform – that meant profits fell by 72 per cent to £16.7m.

But thawing market conditions have seen the company stage a comeback. Sales growth has resumed, thanks to the demise of main rival Allied Carpets. The competitor closed more than 160 stores after collapsing into administration, and analysts estimate that could have released £100m of annual sales back into the market. Based on Carpetright's current market share, that could mean a sales uplift of at least £25m a year.

Added to that, prompt action on costs and a sharp recovery in the housing market – albeit from very low levels of activity – had seen the shares make their way back onto some City analysts' buy lists, and the share price has doubled over the year.

That confidence was shattered last month, though, when Carpetright shocked the market with a warning that its recovery had started to falter. Like many retailers, the company had seen trading affected by the unusually icy conditions this winter, which kept shoppers at home. But where other retailers have seen trade bounce back strongly, Carpetright hasn't recovered as much of the lost trade as it had expected. Like-like-sales growth in the seven weeks to 20 March slowed to 1.4 per cent, down from 2.3 per cent in the 13 weeks to 30 January and 3.9 per cent in the half year to 31 October.

That's likely to leave the company way short of the 11 per cent underlying growth analysts had been expecting in the final quarter to the end of April. And, having been lulled into a false sense of security by confident words from management in February, few analysts have stuck to their 'buy' recommendations in the wake of the profit warning.

Although Carpetright did not suggest specific reasons for the shortfall in its statement, analysts speculate that households may have started to put major household purchases on the back burner in advance of the election and the possible tax increases that may follow.

They also point to wobbles in the housing market after the end of the stamp-duty holiday, which saw mortgage approvals halve in January from the strong December figures as first time buyers raced to beat the deadline. That matters to Carpetright because, as it usually highlights in its results presentations, the direction of UK like-for-like sales is tightly correlated to mortgage approvals.

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Despite month-on-month recovery in mortgage approvals since, as highlighted by figures from the Council of Mortgage Lenders, there is much evidence to support analysts' cautious views on the housing market. According to the council, gross mortgage lending in the first quarter of 2010 will still be more than two thirds lower than the £98.6bn recorded at the market peak in 2007 and the lowest level since 2000.

The council added that the 24 per cent rise in gross lending in March represented normal seasonal movements rather than any underlying improvement, and that monthly volatility would remain a feature of the market for some time. It is also worried about the effect of the withdrawal of around £300bn in official support schemes from next year.

Of course, the UK is still seeing gradual economic improvement, and continuing record low interest rates continue to underpin the market. Carpetright isn't leaving its progress to fate, either. As well as growing its store footprint, it's increasing its exposure to the insurance replacement and housebuilding segments, where it is currently under-represented. This could add £35m to sales in 2011, although at a low profit margins.