The past five years have been difficult for the UK's retail industry and have seen the collapse of many well-known retailers. Contrary to expectations, however, Topps Tiles hasn't been one of them. Admittedly, the tiling retailer has been through the wars, with underlying earnings collapsing from a peak of 15p a share in 2007 to around 5p today. And while such heady figures are unlikely to be achieved again any time soon, recent trading reports do suggest the business is well on the road to recovery.
- Boosting market share
- Increased direct sourcing supporting profit margins
- Net debt under control
- Scope for earnings upgrades
- No sign of housing market improvement
- Tough consumer backdrop
Third-quarter like-for-like sales climbed 2.1 per cent and management is confident that Topps is on track to hit targets for the full year. Broker Panmure Gordon says that Topps needs to generate like-for-like sales growth of 2 per cent in the second half to achieve the consensus full-year pre-tax profit forecast of £13m, but against a very weak comparative performance that's not especially demanding. In fact, says Panmure, Topps' operational gearing means that earnings upgrades are possible, although there is the potential for disruption from the Olympics.
Whatever happens this summer, though, Topps' long-term recovery prospects look good. It has 322 stores but, unlike many other UK retailers, is eyeing expansion rather than cutting store numbers. It added three new stores in its latest quarter and will add another three before its year-end in September. Chief executive Matthew Williams reckons there's scope for as many as 400 across the UK, a figure that is possible because the market for wall and floor tiles is highly fragmented and Topps has scope to grab market share. The nature of the product also means that, unlike other retail categories, such as electronics or entertainment, Topps isn't facing a huge threat from online competitors.
TOPPS TILES (TPT) | ||||
|---|---|---|---|---|
| ORD PRICE: | 41p | MARKET VALUE: | £78.6m | |
| TOUCH: | 40-41p | 12-MONTH HIGH: | 59p | LOW: 22p |
| DIVIDEND YIELD: | 3.9% | PE RATIO: | 7 | |
| NET ASSET VALUE: | ** | NET DEBT: | £46.3m | |
| Year to 30 Sep | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | 179 | 9.88 | 3.90 | nil |
| 2010 | 182 | 12.4 | 4.56 | 1.0 |
| 2011 | 176 | 7.91 | 3.04 | 1.1 |
| 2012* | 170 | 13.0 | 4.90 | 1.2 |
| 2013* | 175 | 14.5 | 5.50 | 1.6 |
| % change | +3 | +12 | +12 | +33 |
*Investec Securities estimates Normal market size: 7,000 Matched bargain trading Beta: 0.89 **Negative equity shareholders' funds | ||||
Topps isn't just relying on physical expansion to add to the 25 per cent of the tile market it already controls, either. It's investing heavily in television advertising, aimed at broadening its appeal to the more affluent end of the market, which may previously have viewed Topps as a more downmarket retailer. It's also building closer relationships with trade customers, an important group that accounts for a third of sales. Although Mr Williams doesn't expect this proportion to increase much further, it still provides an important buffer against weakening consumer confidence - as the resilience of exclusively trade-focused kitchen supplier Howden Joinery has shown.
Naturally, both initiatives will hit profitability - TV advertising is costing an extra £1m or so a year and trade customers are being offered hefty discounts. However, this is being offset by efforts to boost efficiency. Last year, Topps identified £1m in annual cost savings, and it's also increasing the volume of product sourced directly from manufacturers - an initiative underpinned by the opening of a new centralised warehouse last year. This is allowing Topps to offer more competitive prices without hitting gross margin, which is expected to stay at around 60 per cent this year. A new store layout is also being tested at a recently opened 'lab store' in Milton Keynes which, if successful, can be rolled out cheaply. Management has also successfully converted the bulk of its Tile Clearing House discount stores to the more profitable Topps format.
