Carpetright is true turnaround play

Rapid growth in the UK and a return to the black in Europe helped Carpetright more than double half-year profit. The carpet and floorings specialist should now hit the top end of expectations for the full-year, and, importantly, new boss Wilf Walsh has fleshed out plans to revitalise the business following a string of profit warnings. The shares soared by 12% in response.

Underlying pre-tax profit, which excludes last year's £1.1 million loss on property disposals, jumped from £3 million to £6.7 million during the 26 weeks ended 25 October. Like-for-like sales in the UK grew by 6.5%, driving underlying operating profit up by a third to £7.3 million. And in hard-hit Europe, sales fell 3.3% in local currency, but the region is at least profitable again, making £0.1 million compared with a £1.4 million loss last year.

Now, management reckons underlying pre-tax profit for the year ending 2 May 2015 will be towards the upper end of market expectations - currently £8 million-£11 million.

But, less than five months after taking over from carpet industry legend Lord Harris of Peckham, it is Walsh's strategic review that is clearly the key to Carpetright's future. And the approach certainly looks sensible. As part of a six-point plan, the company will tackle the perception of Carpetright as a 'value' brand, introduce interest free credit, new ranges, improve customer service, freshen up stores, invest in a new website, and shut stores, renegotiate rents and introduce smaller 'sample only' shops.

"These changes will take time to take full effect," said Walsh, "but we are absolutely focused on maintaining the recent improvements in the performance of the group, as well as devoting our energies to revitalising our brand and operations in line with contemporary customer expectations. As a team we are excited by the potential that exists and are concentrating hard on execution of this new strategy as we enter 2015."

Peel Hunt was quick to upgrade full-year profit forecasts, up by 15% to £11 million, and by 6% for 2016 to £14.8 million. He broker says:

With Carpetright back in a broadly cash-neutral position and trading on 7.7x 2015E EV/EBITDA, the shares now look good value relative to the longer term recovery potential. This is by no means a quick turnaround, but that longer term potential is significant.

Shore Capital also remains optimistic. In a recent lengthy research note, the broker said that a new strategy that incorporates a reduction in the store portfolio with improved returns could increase both profit and cash generation. If all goes to plan, the shares could be worth 642p and paying a dividend again "within two to three years at worst."

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