Discounter Poundland (PLND) cheapens 6.2% to 290.3p on Thursday, dipping below its 300p March 2014 issue price on a disappointing trading statement. The impromptu update accompanies news of a £50 million placing to help fund the acquisition of 99p Stores, where trading also appears to have deteriorated, heightening concerns the pound shop sector could be running out of steam.

Poundland,  Great Bridge Retail Park, Birmingham. 14th February

Click here to read Poundland's announcement of a planned £50 million placing with institutions, monies it will be use to fund the cash consideration of the £55 million takeover of its UK discount rival. First announced in February, the merger was fully cleared by the Competition & Markets Authority (CMA) this month (18 Sep) and is set to complete (28 Sep) in time for the key fourth quarter, including Halloween and Christmas.

However, due to a protracted CMA review process, Poundland has had 'limited access to recent detailed trading performance data' and says 'indications are that 99p Stores' financial position has weakened somewhat since our original due diligence.'

Poundland 509540297

The £774 million cap, guided by CEO Jim McCarthy, remains excited by a deal it insists is primarily a real estate play. Specifically, McCarthy stresses 'this is largely an asset deal, increasing our store count by 40% through adding 251 stores to our existing UK store estate. We expect significant benefits from converting 99p Stores to Poundland, in terms of sales from introducing our range and value, from margin benefits through increased scale and from the significant cost dilution of adding 251 stores to our portfolio.'

Yet this take on the deal cannot gloss over a downbeat current trading update from Poundland itself. The budget general merchandise purveyor guides towards lower interim pre-tax profits, caused by challenging trading conditions and higher new store opening costs.

Web chart - Poundland - Sep 15

Over the 25 weeks ended 20 September, sales increased 4.9% to £532.1 million at actual exchange rates, constrained by the weak euro. Within the mix, like-for-like sales fell 2.9% against a testing prior year 'comp' and amid tougher conditions in the discount sector. Aldi and Lidl are rampant and the supermarkets are slashing prices in an attempt to win back market share.

Poundland remains confident of delivering full-year pre-tax profit in line with expectations – Shore Capital is sticking with its £47.5 million pre-tax profit forecast for the underlying business – though profits will be weighted towards the second half where sales comparables are softer.

Issue Date: 24 Sep 2015