Carpetright profit collapses as consumer confidence falls

Group turnover at the UK's largest specialist retailer of carpets and flooring increased 2.6% to around £228m in the half year to October 28th, as overseas sales made up for declining turnover in the UK.

However, Carpetright pre-tax profits collapsed 93% to just £300,000 after higher staff costs, a clearance of their bed ranges and aggressive discounting in their business outside of the UK impacted on their bottom line. Its profits were also harmed by one-off costs including losses from store disposals and the upgrading of Carpetright’s IT systems, but even on an underlying basis profits were down 59pc to £2.1m.

The retailer has also faced increased competition from the fast-growing Tapi Flooring Chain, founded by Martin Harris, the son of Carpetright’s founder.  

Here's the Insight DIY Summary of their performance:_

Carpetright Group

• Group revenue increased 2.6% to £228.1m (H1 FY17: £222.3m).
• Underlying profit before tax of £2.1m (H1 FY17: £5.1m).
• Net debt of £22.8m (H1 FY17: net cash £0.4m) reflecting the continued investment in the store refurbishment programme.
• Statutory profit before tax £0.3m (H1 FY17: £4.1m).
• Underlying pre-tax profits for the second half of the year expected towards the bottom end of the current range of market expectations.

UK Business

•  Like-for-like sales in the first half of the year increased by 0.7% (H1 FY17: decline of 2.9%), with solid growth of 1.9% in our core flooring categories offset in part by reduced bed sales, which were impacted by clearance of discontinued lines as we changed the entire range.
• Underlying operating profit of £3.6m (H1 FY17: £4.9m) reflecting impact of beds clearance and higher store payroll costs.

Rest of Europe

• Like-for-like sales growth of 6.5% (H1 FY17: decline of 1.5%).
• Underlying operating loss of £0.4m (H1 FY17: profit of £1.1m).
• Gross profit margin down 730bps reflecting impact of first time inclusion of low margin service income (520bps) and deeper discounting promotions (210bps), which is now being addressed.

Current Trading

More encouraging start to the second half with like-for-like sales in the UK up 1.4% in the six weeks to 9 December 2017 with robust growth of 2.7% in core flooring categories.The Rest of Europe has also made a positive start with like-for-like sales up 9.2% in local currency over the same six week period.

Strategic progress

• Continued investment in store refurbishment programme with 52% of the UK estate trading under the new brand identity by period end.
• Hard flooring category in the UK achieving double digit sales growth as it benefits from increased customer awareness.Focus on improving customer service delivering stronger satisfaction metrics – ‘Trustpilot’ score increased to 8.9.
• Effective response to increased competition - 52 stores have now traded against a new direct local competitor for more than 12 months, delivering like-for-like growth of 5.0% on average during the half.
• Continued progress made in reducing the number of underperforming stores - ten closures to reduce the UK estate to 418 stores.

Commenting on the results, Chief Executive Wilf Walsh, said:

“The first half has undoubtedly been challenging. Consumer confidence remains fragile and we continue to manage the impact of intensified competition. We have made pleasing progress in our core flooring business in the UK - like-for-like sales are up, more than half the UK store estate has now been refurbished and our customer service metrics have been improved significantly. However, as previously flagged, our first half profits reflect the impact of the clearance of discontinued lines in our beds business and also unsuccessful deeper discounting promotions in the Netherlands and Belgium, which are now being addressed.

“Looking ahead we will be focused on maintaining sales momentum in UK flooring, capitalising on the much-stronger new range to turn around our beds performance and improving overall trading in the Netherlands and Belgium. While trading over the first six weeks of the new period has been encouraging, with an acceleration in like-for-like sales growth in both the UK and Rest of Europe, in light of the consumer outlook we are taking a more cautious view of the second half and now expect underlying profit before tax for the full year will be towards the bottom end of the current range of market expectations.” 

Analysis & Commentary

Fiona Cincotta, the Senior Market Analyst at City Index has provided the following commentary for Insight DIY. 

“A sluggish housing market and lower consumer confidence have certainly caught up with Carpetright. Profits are below market expectations and the tone of its guidance statement is decidedly gloomy despite some positive revenue signs coming through early in the second half. 

Competition is also biting, with intense margin pressure not just evident in the Netherlands and Belgium: the UK operating margin has slumped a whole 0.7 percentage points to 1.9%.

Management is working hard to stave off the competition with store refurbishments and there's some potential upside in the bedding business as the old range is cleared. But with the company's cash balance eaten away and net debt rising, the reappearance of dividends looks far from imminent.”

Source: Insight DIY Team & Carpetright Press Release.

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