Three retailers with very different prospects

Two weeks ago, the future looked bleak for retailers. The worst sales data for years followed a profits warning from furniture seller DFS, and inflation outpacing wage growth led many to question the outlook. With consumers feeling the pinch, discretionary purchases are typically first to go.

And a pair of sector names today announced a drop in full-year profit, while one high-street favourite had a grim third-quarter.

But there was divergence when it came to the impact on share prices, with Carpetright up as much as 11% to 200p as results met consensus expectations. Underlying pre-tax profit for the 52 weeks to 29 April fell 21% to £14.4 million, though revenue ticked up slightly to £457.6 million.

The carpet seller spoke of "significant improvement" in the UK during the second half, following a "difficult" first six months. Second-half like-for-like sales rose by 1.8%, partially mitigating a 2.8% decline in the first half. Full-year sales were down 0.5% versus 2.8% growth in 2016, although they're up 2% in the past seven weeks.

Meanwhile, on the continent, while like-for-like sales growth was lower, at 2.5%, underlying operating profit more than doubled to £5.7 million.

In contrast, home shopping company Findel's results for the 53 weeks to 31 March came in well below consensus estimates, with pre-tax profit of £22.2 million down over 10%.

The £160 million firm reported "strong sales performance" from its Express Gifts division - which sells toys, leisurewear and household goods - but its Findel Education had a "challenging" year.

These trends, Findel said, look to be continuing into the current financial year, forcing the shares down as much as 4.5% to 192p Tuesday.

Once again, accident-prone Debenhams was a big name faller. The department store chain has struggled for years and, predictably, it has failed to recover from its Brexit vote beating. In fact, it's now 16% below the bottom reached in the immediate aftermath of the referendum.

Two months after launching its latest new strategy - Debenhams Redesigned - it slipped by a further 4.5% Tuesday to 42.5p, a new eight-year low.

Gross transaction value and like-for-like sales both fell around 1% for the 15 weeks to 17 June, while like-for-like sales at constant currency dropped 2.4%. Annual pre-tax profit is guided to be "within the range of market expectations", with the caveat that "should current market volatility continue, the outcome could be towards the lower of the current range".

Carpetright was one of the worst hit when may's retail sales data came out a fortnight ago. It's rocketed today, yes, but there's a glass ceiling at around 250-255p that's proved impossible to break with any conviction.

Coincidence or otherwise, broker Peel Hunt has set its own price target on the stock at precisely 250p. Management continues to revitalise the brand and has overseen a store refurbishment programme as well as a reduction year-on-year in the amount of stores it runs, to 426 currently.

The store improvements are now driving double-digit sales growth in hard-flooring, there's better uptake of interest-free credit, better underlay attachment rates and net promoter score, says Peel Hunt analyst John Stevenson.

Still, he reckons Carpetright must shut more stores to reduce its fixed-cost burden, "which can play a material part in the group's margin recovery".

Carpetright is one of the most operationally geared stocks in Peel Hunt's coverage, but, performance under the circumstances is "creditable".

"We gain great confidence from the positive response of the refurbishment programme to date and believe Carpetright can deliver market share gains and margin recovery from here," writes Stevenson.

Fellow broker N+1 Singer is more bullish, seeing scope for a return to a pre-referendum price of 300p. Analyst Matthew McEachran is encouraged by its start to the first quarter. "We only envisage edging forecasts down £1 million, implying more than 15% compound annual growth rate," he added. "The positive tenor of the update should help the shares rebound."

Mark Photiades at Cantor Fitzgerald Europe sounds one potential risk, with Orpington-based Tapi, a start-up flooring specialist, looking to muscle in. Development at the firm, set up by the son of Carpetright founder Lord Harris, must be closely monitored, he says.

Cantor covers Carpetright, Debenhams and Findel. Interestingly, the only one it rates a 'buy' is Findel. It says Express Gifts "remains a robust business", while management changes should help Education.

A continued reduction in the number of Education distribution centres will be a positive and, trading on a forecast 2017 PE ratio of 8.7 times, falling to 7.8 in 2018, a share price of 250p is achievable.

Photiades rates both Carpetright and Debenhams a 'hold' (210p and 55p target prices respectively), but Investec today slashed its target for the latter by 15% to 39p, questioning the sustainability of its dividend.

Currently, the stock's forecast yield for 2017 is 8.2%. That halves, though for both 2018 and 2019, with the dividend per share dropping from 3.4p to 1.7p.

Analyst Kate Calvert questions the wisdom of keeping the divi flat this year, given a cut would give management more financial flexibility to speed up or increase its core infrastructure investment.

"We see no silver bullet for Debenhams' structural pressures," she added. "A five-year strategy has been set out to fix the basics, which may well end up just being a profit stabilisation strategy. It is hard to see any real profit progression in the next three years."

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.