Buy Carpetright ahead of rebranding recovery

The company has been busy closing several underperforming or what management deem to be "poorly located" stores. However, its bosses say they have simultaneously been encouraged by the retention of sales in locations where Carpetright has exited stores but kept others. Four "new concept" stores - located on Clapham High Street, and in Reigate, Thurrock and Tunbridge Wells - are said to be performing well, with Reigate a standout performer for profits. The new concept is all about attracting more affluent customers, but this isn't easy for a company traditionally associated with 'affordable' carpets. Chief executive Wilf Walsh launched the rebranding initiative last summer, but said the strategic review also demanded Carpetright sort out its "legacy property" issue. This involves exiting onerous leases and streamlining the estate to minimise the overlap in stores.

There is also potential for Carpetright to develop its product line where, historically, it has underperformed - specifically in hard flooring. And there seems to be lots of scope - Carpetright controls just 3 to 4 per cent of the hard-flooring market in the UK, compared with roughly 30 per cent of the carpets' market. But grabbing that market is easier said than done. Hard floorings - chiefly wooden tiles - are dominated by construction or contracting companies, leaving operators such as Carpetright left only with carpets. But management is confident about the cross-selling opportunity. The idea is, get the customers through the door with what Carpetright does best, and sell them "add-on" products as their decorating projects expand. Equally, those who have a significant grip on hard-flooring categories tend to be independent businesses. Carpetright's bosses see that as an advantage since they're often easier to take market share away from.

Of course, Carpetright's interest-free credit offer needs to be held up to close scrutiny, too. The company recently extended its terms - originally set up in 2014 on a three-year payback basis - to four years' interest-free credit on a minimum spend of £2,000. This should send average order values up, and act as a stimulus for like-for-like sales growth. Importantly, the credit is underwritten by Hitachi Finance, where most of the risk will lie if the market turns and customers default. True, Carpetright's cash flows would take a hit, but in the near term we see it as a popular offer for customers whose spending is under pressure from other rising costs.

Reinstating a dividend is an ongoing discussion at board level. The official line is that a resumption of payouts must be "sustainable" and balanced against the priorities of investing in the business. So far, analysts at broker Shore Capital have seen fit to factor in a dividend for 2016-17 and beyond (see table).