Interactive Investor

No holding back rampant Carpetright

30th June 2015 13:52

Lee Wild from interactive investor

Who'd have thought the world of carpets and floor coverings could be so financially rewarding. Carpetright had made a reported loss for two years on the trot, but new boss Wilf Walsh has pulled the unfashionable retailer out of a tailspin. Investors who bet on the former managing director of Gala Coral will be quids in, but are the latest knockout numbers a reason to stick around, or a cue to trouser profits?

It's been six months since we backed Walsh's "sensible" turnaround, and 10 weeks since reporting further upside was likely. Well, Carpetright shares are up 76% since December, and upgraded profit forecasts have been met.

Underlying pre-tax profit, which strips out £7 million of onerous lease provisions and £0.6 million of other one-offs, soared to £13 million from £4.6 million in 2014. That was bang on estimates upgraded from £10-£11 million by management in April. A 3.3% increase in sales to £462.6 million also matched expectations, although a 7.3% jump in UK like-for-like sales was a little light.

True, the "encouraging start to the new financial year "shows UK like-for-like sales growth slowing to 4.9% since April, but in the Rest of Europe - which returned to profit last year as the sales decline slowed to a crawl last year to April - like-for-like sales are up by 7.4%. Net debt of £11.1 million turned to net cash of £0.5 million, too.

"While this is just the beginning of the journey to transform Carpetright, we have a clear direction and the positive results we are seeing from a number of our initial activities give us confidence that we are on the right path," says Walsh.

And his six-point plan is clearly getting results. "New retail concepts" and a new logo will be trialled this month, and £4.5 million is being invested in a complete systems overhaul at stor level. The introduction of interest free credit on Boxing Day 2014 has been received "very positively", and over 111,000 shoppers are visiting the website every week, up 28% on last year. With leases on 27% of UK stores up for renewal within the next five years, there's further opportunity to cut fixed store operating costs, too.

"Following this encouraging update we hold our present forecasts for Carpetright albeit there may be scope for us to positively revisit these numbers noting that there could also be upgrades in the market," writes Clive Black at Shore Capital.

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At Cantor Fitzgerald, analyst Freddie George is unhappy at the lack of dividend - there hasn't been one since 2011. It also believes that interest free credit may have been a significant one off benefit, and that Tapi - a new venture set up by the son of Carpetright's founder Lord Harris - could impact the £400 million company.

"The stock, which has risen by 35% over the last quarter since Q4/2015 earnings upgrade, is most highly rated 'bricks and mortar' retailer and is the valued at a significant premium to peers, Topps Tiles (TPT LN - BUY - TP 135p) and Dunelm (DNLM LN - BUY - TP 930p)," adds George.

On Cantor's "top of the range" earnings per share (EPS) forecasts for 2016 of 21.3p, Carpetright trades on a forward price/earnings ratio of 29 times. That certainly looks toppy, even for a recovery stock growing profits at 20% a year until at least 2017. The valuation does look more favourable on an enterprise value/sales basis, and both Shore Cap and Citigroup have said before that the shares could be worth much more.

Indeed, the rally may not be over - it would be encouraging if Cartpetright shares could establish support above 600p, with significant technical resistance unlikely until 700p. Upgrades would, of course, improve the picture, too. That said, the shares have doubled since December and much is already priced in. That leaves less upside and greater risk for new investors, while those sitting on tasty returns should remember "it's never wrong to take a profit".

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.