Carpetright floored by higher interest rates
Investment Column
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Your support makes all the difference.CARPETRIGHT HAS never had it so bad. Even Lord Harris of Peckham, the retailer's founder and chairman, has never seen a carpet market like this in his 40 years in the business. People aren't buying the things even if you slash the price, he says. Investors have been avoiding the shares in similar fashion. They have now almost halved in a year, falling a further 13 per cent to 274.5p yesterday, their lowest point in four years.
The latest fall follows lower than expected full-year profits of pounds 29m, down from pounds 32m. Coming hard on the heels of the company's warning of a sales slowdown in March, the figures had analysts cutting their forecasts from around pounds 34m to pounds 25m for the current year.
What has gone wrong? The problems are partly external. Higher interest rates are deterring consumers from buying big ticket items like carpets and furniture, hence the recent profits warnings from DFS and MFI. The carpet market fell off a cliff in December and January, which are traditionally strong periods for carpet sales.
However, mistakes have also been made internally, including spending too much on advertising and over-hiring. The result was a dramatic fall in the net margin, which dropped from 13.8 per cent to 10.8 per cent as costs rose ahead of sales. Lord Harris plans to cut pounds 4m from the cost base this year. He expects to maintain margins across the group this year but has scaled back expansion plans.
With the next move for interest rates expected to be up, this year is clearly going to be grim for Carpetright. On a lowly forward rating of 12 the shares could offer good longer-term value but are not worth chasing in the short term.
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