Home improvement retailer Carpetright (CPR) jumped 2.2% to 619p after reporting a surge in annual profits. Yet sales remain weak at the operationally-geared cyclical, which actually lurched into the red after hefty exceptional charges. Most analysts remain bearish on the stock.


The £420 million cap reported 142.5% growth in 'underlying' profit before tax to £9.7 million for the year ended 27 April. Yet cynics may regard this result as a classic example of window dressing.


This flattering figure strips out £14.8 million of exceptional items, including losses on property disposals, onerous lease provisions and property asset write-downs, as the recovering retailer continued to reduce overall store numbers and cut its rent bill.


Once you add back these exceptional items, Carpetright actually incurred a 'statutory' loss of £5.1 million versus a £13.5 million profit a year earlier.




The topline fell 2.9% to £457.6 million. Sales were flat at £381.6 million in the core UK business, where consumer disposable incomes are being squeezed and mortgage approvals are still subdued. Alarmingly, sales reversed 15.5% to £76 million in the 'Rest of Europe' region, where the Netherlands is proving a particularly tough market.


The good news is chief executive officer (CEO) Darren Shapland's self-help initiatives are paying off. These include store refurbishments, development of the firm's digital offering as well as the extension of its offering into beds, laminate and luxury vinyl tiles.


With the benefits of store refurbishments and a slightly improved market coming through, UK like-for-like sales grew 2.2%, while gross margins increased to 61.5% (2012: 58.9%) with the help of better sourcing and improved promotional planning. Carpetright also regaled investors with good news on the balance sheet, with net debt reduced by £8.9 million to £10.2 million, well down from the £97.1 million figure reported in 2009.


The fully-listed firm has decided not to restore the dividend, cut in 2011, with the board looking for a continued recovery in performance before restoring the shareholder reward. However, this morning's original results announcement, ahead of an amended release pushed out 26 minutes later, contained the letters 'TBC' in the dividend column. This suggests there some debate around the boardroom table on whether to return Carpetright to the dividend trail.


carpetright divi


Despite today's optical profits surge, analysts are largely bearish on the stock. Cantor Fitzgerald has reiterated its 'sell' rating and 500p price target for Carpetright. Analyst Kate Calvert writes: 'While the UK housing market and mortgage approvals have shown some encouraging signs of improvement, it is from a very low base relative to history and far too early to call a wider recovery we feel.'


Espirito Santo's Sanjay Vidyarthi is sticking with his 'sell' rating and has a 300p fair value estimate for the stock, less than half today's share price. 'We do not expect any changes to consensus estimates today,' says the analyst, whose 17.5p earnings estimate for the current year places Carpetright on a punchy prospective price/earnings (PE) ratio of almost 35 times. 'While we acknowledge that estimate momentum is more likely to be up than down, we think that this is more than in the valuation,' argues the retail sector sage.

Issue Date: 25 Jun 2013