A major profit warning has rocked Carpetright (CPR) which also announces the surprise departure of chief executive officer Darren Shapland. He's only been in the top job for 17 months and was generally considered very close to chairman Lord Harris of Peckham. The latter will now run the business in an executive role. The shares fall 10% to 605.75p.


Carpetright blames a softer UK market and further decline in trading in the Netherlands for today's warning. It says full-year profit will be 'significantly' below previous expectations.


Like-for-like UK sales are down 2.5% in the 10 weeks to 29 September. The rest of Europe (Netherlands, Belgium and the Republic of Ireland) fell by 7.6%.


Shares has long considered Carpetright vulnerable to a sharp correction, given its lofty rating. Investors must understand that highly-rated stocks will fall fast upon the slightest bit of bad news. Prior to today's news, Carpetright was trading on 42.7 times forecast earnings for the current financial year.


We wrote in June that the business was guilty of window-dressing its full-year results. It reported a surge in profit but sales remained weak. Earlier that month we said the valuation looked up with events and that investors should sell the stock at 615p. While the shares hit 673.5p yesterday, today's profit warning illustrates that we were right to flag up the risks.


Stockbroker Cantor slashes its April 2014 year-end pre-tax profit forecasts from £14.6 million to £11 million. That takes the earnings per share down from 14.6p to 11.7p, therefore implying the shares (following today's fall) trade on 51.8 times forecast earnings which, frankly, is ludicrous.


Investors have clearly been blinded by hopes that self-help initiatives, together with a stronger housing market, would boost earnings. Indeed, a quickly glance at earnings forecasts prior to today's downgrades shows a pre-tax profit trend of £3.5 million in 2012, £9.7 million in 2013 and then forecasts of £14.2 million in 2014, rising to £19.4 million. That level of earnings growth would naturally warrant a high share price valuation yet it is worth remembering that those figures are a business recovery story, not a fundamental growth story. We see absolutely no reason to change our 'sell' stance on the stock

Issue Date: 04 Oct 2013