Now forgive me for being a sceptic, but isn’t the downtrodden consumer being squeezed on all sides? Salary expectations are being pegged back by the threat of off-shoring jobs to lower-wage countries (such as India and China), while household utility bills, council taxes and petrol prices are all rising.
Moreover, the retail sector is being dogged by discounting, higher rents, increased energy costs and overcapacity. In this harsh environment, sales of discretionary, high-value items must be at risk. Indeed, on 9 May, the British Retail Consortium stated that UK sales of “housing-related and big-ticket items remained largely discount-driven”.
Land of Leather (LAN, 256p), tipped by The Daily Telegraph and The Independent
Well, you wouldn’t have believed this from reading The Daily Telegraph
and The Independent last Thursday. Both tipped Land of Leather as a buy following the release of their results. Certainly, the firm has performed creditably, but in my mind it can’t defy the laws of gravity. Over the past two years, its sales have benefited from the demise of some of its rivals, such as Klaussner, Furniture Land, Courts and Allders, while its profit margins have improved as leather sofas have been sourced from the Far East. But these benefits have now largely run their course.
Slowing growth
Although both newspapers commented on the overall 24% increase in revenue, neither noticed that there had been a marked slow down in like-for-like sales orders from 7% in the first half to only 1.3% in the second half of the year. Indeed, with more non-specialist retailers – such as Next, BHS, Argos and M&S – entering the market, performance could go pear-shaped, particularly if there is a price war in the home-furniture market. Moreover, the board “expect retail conditions in the UK to remain challenging”.
Major risk of overcapacity
Surprisingly, LAN is planning to increase its floor space by expanding existing stores and opening another ten new shops each year until 2012. To me, with the prospect of lower prices and greater competition, at best this strategy seems questionable. Surely consolidation rather than expansion would be a better approach? Finally, in the short term the World Cup may also hold back trading, as consumers opt to stay at home to watch the football, rather than replace their existing sofas. LAN could be particularly affected, since around 45% of its sales are to lower-income households.
Profits are likely to come under intense pressure
From first impressions, at 256p, the shares appear fairly valued, trading on a p/e ratio of 12, which is a slight discount to the overall retail sector. However, with the headwinds of margin compression, price discounting and lower demand, frankly I wouldn’t be surprised to see LAN’s earnings per share falling from current levels. Furthermore, as the company does not own its property, without this asset backing, it’s less attractive to private equity as a takeover target.
Recommendation: SELL at 250p
To sum up, I believe that, at best, the shares will tread water over the next two years, but could materially underperform as the market becomes more competitive.
Paul Hill’s personal portfolio has gone up by 483% over the last five years. Click on the link below to find out more about his specialist share-tipping service.