Retailer Topps Tiles (TPT) tumbled 6.7% to 64.4p after the UK’s biggest tile specialist reported a drop in fourth quarter sales and issued cautious earnings guidance.

Signs of a toughening market prompted analysts to downgrade earnings forecasts for Topps, an operationally geared retailer with exposure to the UK’s challenged residential and renovation construction markets.

MARKET GETTING TOUGHER

In a year-end update, Topps Tiles highlighted a ‘more challenging economic backdrop, with uncertainty impacting on consumer sentiment’ over the final quarter of the financial year ending 28 September. Like-for-like sales decreased by 1.9%, rather disappointing given same-store sales grew by 3.8% in the third quarter.

VEILED EARNINGS ALERT?

Pointedly, Topps Tiles said adjusted pre-tax profits for the year just ended are expected to be ‘within the range’ of current market estimates, as opposed to rather ‘in line’ with or ‘ahead of’ City forecasts. Before today, analysts were looking for pre-tax profits of between £15.5m to £16m with a consensus of £15.8m, so earnings could come in at the bottom end of that range.

Chief executive officer Matthew Williams insisted Topps Tiles’ sales growth across the group for the year as a whole ‘compares favourably with the overall tile market’.

Indeed, like-for-like sales were in positive territory, up 0.6%, although this fell short of the 0.9% growth called for by Liberum Capital.

Adjusted revenues (stripping out acquired businesses Parkside Ceramics and Strata Tiles) are expected to be in the region of £214m, slightly down on the previous year’s £214.8m top line haul.

READ MORE ABOUT TOPPS TILES HERE

Williams continued: ‘However, political uncertainty continued to weigh on consumer confidence in the final quarter and we expect this to remain a feature until there is greater clarity’, although longer term, he is confident ‘that our growth strategy will continue to deliver market outperformance’.

CONFIDENCE IN COMMERCIAL

Amid testing market conditions, Topps Tiles is taking the fight to the competition through the launch of innovative new tile ranges while investing in its digital strategy. Williams also made confident noises regarding Topps Tiles’ entry into the UK commercial tile space via the acquisitions of Parkside and then Strata, which has doubled its total addressable market to over £700m.

Liberum Capital insisted the retailer’s “Disrupt and Construct” strategy within the commercial space is making good progress, with the division expected to generate revenue of around £5m in the year. ‘This roughly reflects a doubling versus the prior year,’ said the broker, ‘which is a strong out-turn given market conditions and gives confidence that Topps Tiles is gaining share.’

The broker stuck with its ‘buy’ rating and a 95p price target, one implying 48% potential upside. ‘Topps’ full year 2019 update confirms that underlying pre-tax profit will be within the current range of market expectations, which we view as a resilient performance against a tough market backdrop’, commented the broker, while lowering its 2020 and 2021 pre-tax profit forecasts by 6%, from £16m to £15m and £16.8m to £15.6m respectively.

‘We remain confident of the group’s ability to capture long-term growth opportunities, including within the UK’s commercial tile sector, which has doubled its addressable UK market size. The group’s quality metrics, including its balance sheet, remain healthy.’

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Issue Date: 02 Oct 2019