Carpets and beds retailer Carpetright's (CPR) share price looks increasingly threadbare, trading 0.75p lower at 195p as a half year trading statement reveals a 2.9% dip in UK like-for-like sales.
CEO Wilf Walsh (pictured below) is a brave man, leaving profit expectations for the full year to April unchanged. Yet with the competitive landscape intensifying, the retailer has an uphill task in meeting the year's £18.5 million underlying pre-tax profit consensus estimate.
INTENSE COMPETITION
Click here to read today's update covering the 25 weeks ended 22 October, which illustrates why investors should always be alive to emerging competitive threats.
While Carpetright's European business continues to improve, sales from UK stores open at least a year fell 2.9% in the half. Trading in Carpetright's core market was hampered by variable consumer sentiment and a ramp up in competition from new entrants.
Among them is the Tapi chain run by Martin Harris, the son of Carpetright's founder Lord Harris of Peckham, which has a fast-track approach to growth. Self-styled 'Sofa Carpet Specialist' ScS (SCS) is also snapping at Carpetright's heels with a carpets, laminate and vinyl flooring range that is gaining traction with shoppers.
'Trading conditions in the UK in the first half reflect variable consumer demand and increased competitive pressures,' concedes Walsh. 'Against this background, our plan to revitalise the UK business remains on track and we are now almost halfway towards our target of 100 store refurbishments in the current financial year, with investment in the first half weighted to the latter part of the period.'
Appointed to the hot seat in 2014, Walsh is seeking to extend the Carpetright brand's appeal beyond the traditional value-oriented shopper and entice a more affluent, aspirational consumer; the retailer now has 49 stores, more than 10% of the total UK estate, trading under this new brand identity.
CURRENCY HIT
Today's second key takeaway is Carpetright's downgrading of full year UK gross margin guidance to a decline of between 150 to 200 basis points, sourcing costs rising following the devaluation of sterling following the vote for Brexit. Margin expectations are also being re-set to reflect competitive pricing and mix pressures.
'This will be slightly offset by an increase in the Rest of Europe gross margin to between 100-150 basis points,' writes Shore Capital's George Mensah, who leaves his 'buy' rating unchanged for now. 'Underlying trading in the Europe continues to be strong with like-for-like sales in constant currency terms increasing by 0.9%, this was above management’s expectations.'
'Whilst we feel the business is making progress in implementing its new strategy and the new concept stores appear to be gaining traction with the consumer, we recognise that the competitive pressures have heightened in the flooring segment,' adds Mensah.
