Poundland shares drop despite rise in profits

Shares in Poundland fell today despite an improvement in profits as sales growth slowed down in the last three months.

The discounter that sells everything at £1 warned of a ‘relatively subdued’ first half after sales for the 11 weeks to mid-June were 4.1 per cent higher on a current currency basis – a slowdown compared to 11.8 per cent growth in 2014/15.

But last year’s first half was ‘exceptional’, with sales growth of 15 per cent thanks to a late Easter, fewer competitor openings, warm weather, and the 'one-off' loom bands craze. Shares rebounded from an early 5 per cent fall to trade down 5.15p, or 1.66 per cent, at 305.95p.

The trading update comes as Poundland has been growing from strength to strength over the past years, banking on shoppers’ growing demand for cheap products in a time of recession that has seen other discounters such as Aldi and Lidl win market share from the ‘big four’ supermarkets.

But grocers Tesco, Sainsbury's, Morrison and Asda have embarked on cost-cutting to win back customers and some commentators have suggested that this might be starting to pay off, eating into Poundland's sales.

Brenda Kelly, head analyst at London Capital Group, said: 'Sales were slightly weaker than expected and a lot lower than the 7.1 per cent growth seen in Q4.

'This was to be expected given that the major supermarkets are finally starting to see the light in relation to cost cutting and service improvement.'

Poundland, which counts 588 stores in the UK, smashed the £1billion sale barrier earlier this year and has embarked on an aggressive expansion, opening 60 stores during the last financial year and having another 60 store openings on the cards for this year in the UK, year including 10 under the Dealz brand in Ireland.

Underlying pre-tax profit in 2014/15 rose 19 per cent to £43.7million, in line with forecasts, on the back of 12 per cent sales growth to £1.12billion.

Chief executive Jim McCarthy said Poundland and its Dealz brand operating in Ireland were ‘still under-exploited... with many more years of new store opening growth’.

But he warned that Poundland said it faced ‘a number of headwinds’ in the first half of this financial year, especially the weak euro.

‘Notwithstanding a challenging start to the year, I expect to see a year of growth for Poundland as we have a very strong opening programme and we will continue to be the standard bearer for genuine and amazing value,’ he said.

Poundland said the outlook for the second half was better, reflecting softer sales comparables, a strong first half opening programme of at least 40 net new stores, against 28 stores last year, and the annualisation of last year's new store programme.

Shares in Poundland, which listed at 300p in March last year and hit a high of 421p in February, fell more than 20 per cent over the last three months.

Keith Bowman, Equity Analyst at Hargreaves Lansdown Stockbrokers, said: ‘The group faces tough comparatives over the current first half, store outlets in Ireland and Spain are battling currency headwinds in the form of a weaker euro, whilst the recent growth in UK wages ahead of inflation, if continued, could possibly dampen the appeal of discounters for some consumers moving forward.’
And added: ‘For now, and despite expected longer term growth, the share price near term appears to be ‘up with events’, with analyst consensus opinion on balance pointing towards a hold.’

The update comes as Poundland is awaiting a decision from the competition watchdog’s in-depth probe about its £55million takeover of smaller rival 99pStores.

In last month’s report, the CMA said the takeover, which would create a network of 800 shops, could mean 'substantial lessening of competition in 80 local areas where the companies overlap' and 12 where they would compete 'in the near future'.

The CMA originally found that after the takeover, Poundland would only face competition from one other single-price retailer with national scale, Poundworld, as well as from other discount retailers B&M, Home Bargains, Wilko and Poundstretcher.

Paul Thomas of retail consultancy Retail Remedy warned that while German discounters Aldi and Lidl have been more of a threat to the ‘big four’ supermarkets than to Poundland, this could change.
‘The German discounters’ growing firepower could soon be turned on Poundland. And after having things its own way for so long, this is may prove one of the toughest tests of Poundland’s defences in its 25 year history.

‘With this threat just over the horizon, Poundland's planned acquisition of 99p Stores – which would bring a 50 per cent increase in the number of stores – risks being an overextension.’

British retail sales growth slowed sharply last month after strong growth in April, as shoppers bought fewer clothes, official data showed today.

It comes as recent data showed the decline in the number of shoppers on the High Street continued last month as people increasingly shop online or opt for out of town centres where they can park for free and find entertainment for the family.

Source : Camilla Canocchi - ThisIsMoney.co.uk
www.thisismoney.co.uk/money/markets/article-3129416/Poundland-warns-tough-half-thanks-weak-euro-sales-growth-slows.html