Carpetright's sales tumble

In the midst of the UK's deep recession, where even the government’s relatively optimistic expectations suggest that the economy could shrink by 3.5 per cent in 2009, it’s a tough time to be a retailer. Indeed, the British Retail Consortium's latest figures revealed that total UK like-for-like retail sales had slipped 1.2 per cent in the year to end March. But, even against that backdrop, not all retailers are equal and floor coverings specialist Carpetright looks especially vulnerable.

The scale of Carpetright's vulnerability was revealed at the end of last month when a trading update from the group reported that like-for-like sales in the 25-week period to 25 April for its Irish and UK operation had slumped 15.1 per cent. To a considerable extent, that reflects the bleak housing market. Customers tend to splash out on new carpeting when they move into a new house but, in a housing market where activity has collapsed - the Council of Mortgage Lenders says that gross UK mortgage lending in March was down 52 per cent year-on-year - then demand for carpets has gone the same way. The European operation - Carpetright has 128 stores in Holland, Belgium and Poland - isn’t exactly booming, either. Local currency like-for-like sales there have slipped 1.4 per cent in the last 12 weeks.

Predictably, profitability is coming under pressure. With the group’s trading update, management said that the second-half’s gross profit margin is likely to be 1 percentage point below last year’s figure. Management blames the appreciation of the euro for that, which has pushed up the cost of stocks, as well as increased promotional activity.

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And profits won’t be helped by the interest bill from the group’s growing debt pile. Reflecting such factors as new-store openings and the acquisition of the Sleepright bed business last year, management says that net debt had reached roughly £95m by the end of April. That, according to analysts at broker Numis Securities, is about £15m worse than expected and will mean a £7m interest hit next year. At least the group has negotiated the renewal of its principal banking facilities, which will provide it with committed funding until July 2012.

And Carpetright has other strengths. To begin with, it occupies the dominant slot in the UK with a 30 per cent share of the floor-coverings market. This should leave it well paced to take advantage of better times, when they eventually materialise. Moreover, Carpetright should be able to profit from the difficulties being faced by its rivals. Specifically, the new owner of Allied Carpets, Sigma Capital, is currently performing a strategic review of the business and analysts at Numis Securities say that Allied could look to close about 70 of its 250 store portfolio. That could hand Carpetright a decent opportunity to further improve its market share.

Management is cutting costs, as well. True, the group has continued to open new stores - a net three new UK stores were opened in the second half of 2008-09, taking the total to 564. But the rate of openings has slowed dramatically and, with the half-year figures in December, management said that the group’s total headcount had been cut by around 200. Partly as a result of that, Numis Securities says Carpetright should deliver a reduction in operating costs for the year to end-April 2010 of about 2 per cent.