Many retailers are reporting challenging, or downright dire, conditions as consumers tighten their belts. Homeware specialists such as ScS Upholstery and Land of Leather have recently issued brutal profit warnings.
So what does this mean for Britain’s top floor-coverings retailer? You would expect the shares to have suffered, given its peers’ problems, yet surprisingly, they have held up quite well. But this can’t continue. Here’s why.
Carpetright (CPR), rated a BUY by Panmure Gordon
First, the shares seem to be artificially buoyed by bid speculation. In 2007, CEO, founder and main shareholder, Lord Harris tabled a £12.50 bid for the group, but was forced in December to withdraw after the credit crunch hit his funding arrangements. Secondly, while the group has not yet warned on profits, I believe this is only a matter of time. At its pre-close trading statement it said that “like-for-like revenues were down 1.8%”, and Britain was suffering a “weakening environment”. Worse still, the soaring price of oil, a key raw material for making yarn, will drive costs higher.
Lower sales and escalating costs mean earnings will come under pressure. For a shopkeeper like Carpetright, where fixed expenses, such as rent, rates and salaries, represent over 50% of turnover, this could hammer profit margins. Most of its stores are run under long-term leases (eg, over ten years), which will inhibit the board’s flexibility if the property portfolio needs to be trimmed.
Finally, I suspect Carpetright’s results have been given a one-off boost over the past nine months by last summer’s wet weather, when over 50,000 properties were flooded. The firm has around a 20% share of the British market, so this one-off event could have lifted earnings by about 10%. The City expects sales and earnings per share of £553m (up 5.3%) and 59.2p respectively for the year-end April 2009. That’s a big leap of faith, especially given the group’s hefty exposure to residential housing.
At 795p, the stock trades on a forward p/e multiple of 12.8, which looks too expensive. I’d value Carpetright on ten times earnings (25% less than today), which recognises its premium brand but adjusts for the cyclical nature of the sector. Full-year results are out on 1 July.
Recommendation: SELL at 795p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments