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Carpetright faces huge challenges

TIP UPDATE: Carpetright (CPR) has fallen into the red after a miserable 12 months.
June 24, 2014

Floorings specialist Carpetright (CPR) is licking its wounds after a profit warning in January. Judging by its full-year results, huge challenges still lie ahead. As expected, the adjusted pre-tax profit halved to £4.6m, as improved UK trading was offset by a poor showing in Europe. This profit figure strips out £11.8m of exceptional costs, mostly relating to onerous lease provisions, which explains why the reported results show a pre-tax loss.

IC TIP: Sell at 506p

In the UK, sales fell 1.5 per cent, with like-for-like revenue broadly flat. Good cost control and gross margin improvement meant adjusted operating profit dipped just 1.8 per cent to £10.7m. Trading was much worse in Europe, however. A deteriorating floorings market depressed sales, resulting in a loss of £3.8m.

Plans are now afoot to turn this ailing retailer around. The European business has a new management team with a strategy centred on cost savings and margin improvement. Stores in the UK are being revamped, with 58 per cent of the estate refurbished to date. Smaller 'sample-only' formats have been trialled, with encouraging results. This modernisation programme will be rolled out across Europe, with 33 shops already refurbished.

Ditching costly leases will continue to be a major focus too. In the past 12 months, management has negotiated exits from seven locations in the UK and achieved an average rent reduction on renewal of 19 per cent. In continental Europe, Carpetright is also negotiating with landlords, and achieving rent reductions in Holland and Belgium. However, the Irish business is locked into leases spanning over a decade, and excessive rents relative to sales are a major reason for the division's lacklustre performance.

The final important piece of news was that Lord Harris is to remain as non-executive chairman after the AGM in September; the group had previous announced he would leave the board. New chief executive Wilf Walsh will still take up the reigns on 21 July.

Cantor Fitzgerald Europe has downgraded its pre-tax profit forecast for the current financial year to £8m from £9m, taking EPS down to 8.6p.

CARPETRIGHT (CPR)
ORD PRICE:506pMARKET VALUE:£343m
TOUCH:504-509p12-MONTH HIGH:703pLOW: 493p
DIVIDEND YIELD:nilPE RATIO:na
NET ASSET VALUE:90p*NET DEBT:18%

Year to 26 AprTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201051722.323.516
20114876.66.88
201247213.516.4nil
2013458-5.1-9.8nil
2014448-7.2-5.3nil
% change-2---

Ex-div: na

Payment: na

*Includes intangible assets of £58.6m, or 86p a share