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Carpetright suffers weak Christmas but sees Boxing Day sales boost

Discussion in 'Market News' started by Lily, Jan 26, 2016.

  1. Lily

    Lily Forum Member

    Aug 29, 2015
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    Company’s shares drop after trading update shows slow festive period

    Carpetright looked a bit threadbare over the festive period, according to its latest update, but was given a boost by the January sales.

    Like for like sales in the twelve weeks to 23 January grew by 2.4% but the post Christmas period saw a 6% increase, helped by an improved interest free credit offer. The company said its full year profit expectations were unchanged, but its shares have slipped 40p to 410p. Chief executive Wilf Walsh said:

    While we saw some softening of like for like sales in the pre-Christmas period, reflecting lower footfall, customer numbers recovered in the important January sale period. Our trading performance over the last four weeks... gives us confidence that the enhanced interest free credit offer and strong promotions launched on Boxing Day are hitting the spot with our customers.

    There are two key pillars to earnings recovery at Carpetright; rebalancing the retail estate and driving improved sales densities. Store closures in the current financial year are already on track to create annualised cost savings of more than £10m, the driving factor behind forecast upgrades in December. The sharp pick up in interest free credit penetration as a result of greater staff focus and a revamped offer creates the potential for short term trading upside. Trading on 2017 estimated PE of 17.1 times and delivering compound earnings per share growth of around 25%, the recent share price weakness represents a more compelling entry point for investors.

    Today’s update reflects a period where trading on the High Street was much more challenging, consequentially impacting the likes of Carpetright. It is also possible that the UK consumer may have prioritised lower ticket purchases during the run up to Christmas in light of an increased promotional environment, whilst being fully aware of the propensity to discount, after the festive period, by Home Furnishing retailers.

    However we remain bullish on the stock given both, the acceleration in trading post Christmas, where like for like sales increased 6.0% and also what we believe to be the long-term benefit of operating from a much smaller base of retail stores. Guidance for full year profit expectations remains unchanged, with our current forecast for 2016 set as £17.5m.

    Wilf Walsh’s strategy, which is likely to include a store refurbishment programme and several new initiatives, is sensible. However, we do not expect these initiatives to lead to a step up in earnings momentum despite significant operational gearing in the company’s margin structure. On that basis, the stock, we believe, is too highly rated at 23 times 2016 earnings putting it at a premium to peers. We are reducing our ‘top of the range’ forecasts. We are maintaining our hold recommendation, but reducing our target price to 440p (from 470p) partly to reflect the earnings downgrade.

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