Carpetright rally meets sticky end

Carpetright shares sank as much as 15% Tuesday after the floorings chain warned annual profits would come in toward the bottom end of forecasts. It's the second time this year analysts have cut forecasts, but that dive to an eight-week low was brief, and City scribblers are proving a bunch of unswerving optimists.

"Whilst we remain confident in our turnaround plan, the level of sales growth in our final quarter leads us to expect that full year profits will be towards the lower end of the current range," chief executive Wilf Walsh told shareholders.

That means underlying profit before tax for the year ending 29 April 2017 will be nearer £13.9 million than £16.2 million. N+1 Singer analyst Matthew McEachran doesn't think it will be any more than £15 million.

Walsh talked of tougher trading conditions in the past three months, and while fourth-quarter like-for-like sales in the core UK market did grow 1.4%, that was slower than expected and down from 1.9% in Q3. Like-for-like sale in Europe were also up 1.4%, as expected.

Crucially, Carpetright has smashed its target of 150 store refurbishments, hitting 188 - over 40% of the UK estate - after ramping up activity in the past few months. With performance in these stores "encouraging", the programme continues.

Today's sell-off is no surprise, given the shares have delivered shareholders massive profits over a very short timeframe. In the 10 weeks between January's third-quarter results and 9 March, they had risen a stunning 46%. And, up around 64% in 2017 until this morning's dive, they've easily outperformed listed peers - Victoria is up 36% and United Carpets down 2%.

And the shares were fast-approaching a major level of technical resistance. Visually, 250-260p is a key area, historically. Near the 23% Fibonacci retracement of the decline from the June 2015 high to December 2016 low, they've tried and failed to hold that level a dozen times since last June's EU referendum.

Carpetright has proved a bit of an enigma since late last year. Its share price did look to have bottomed out in December, and there was encouragement in January's third-quarter results. Walsh said the "turnaround strategy is on track", and we admitted that the shares certainly looked cheap. 

Risk-takers will have done well, but, given recent history, we did suggest "cautious investors might wait for evidence in the April update that this sales growth is actually a trend and not a one-off".

Well, the market didn't listen, and the shares rocketed. But, as some consolation, these latest numbers have at least vindicated our belief that they might throw up some nasties.

That 250-260p level will likely remain a key stumbling block for Carpetright shares, requiring a magic set of numbers to make a break above the line stick and provide a platform for further upside.

Still, Peel Hunt's John Stevenson thinks it will happen. He admits that further slippage in numbers is "disappointing", but that "there is now a clearer trend in performance coming from the new format stores, which we expect to deliver greater self-help momentum over the year ahead."

Despite whipping £1 million off profit forecasts for 2017, the price target flies up from 250p to 300p. That's a view shared by fellow bulls at Singer, where McEachran suggests "any weakness presents a buying opportunity".

Longer-term maybe, and there might be a short-term trading angle here, too, but it's far from clear-cut and, even on a forward price/earnings (PE) ratio of 12.1 currently, Carpetright remains high-risk. What is clear is that final results on 27 June will likely prove a catalyst, but which way?

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.