Carpetright rolls out the profits with right formula

The Investment Column

The share price reaction to Carpetright's results was similar to that regularly experienced by Next. A cracking set of results is met by a fall in the share price because the figures were not even better. True, the results were at the lower end of expectations but a 28 per cent rise in pre-tax profits to pounds 25.2m is not to be sniffed at. Most retailers would kill for a set of results such as these.

It is clear that Carpetright's chairman, the ever-ebullient Lord Harris of Peckham, has got his formula right: low prices, decent value and regular promotions to keep the customers interested.

Carpetright already has 12 per cent of the UK carpet market and the target of 30 per cent by the end of the decade looks achievable.

Like-for-like sales improved by a staggering 13 per cent last year and the trend has continued since the April year-end.

This is even more impressive when you consider that the overall market shrank by 4 per cent last year.

To bolster sales, Carpetright offerered more special promotions, which shaved one percentage point off the margin, but that should be clawed back this year.

By the year-end Carpetright was trading out of 246 stores, including 200 of the core chain.

The start-up of the Premier Carpet concessions and the larger Carpet Depot formats cost pounds 1.6m last year. A further 30 Premier Carpet concessions should open in the next 12 months, taking the total to 77.

Another 25 Carpet Depots will also open, taking the total to 34. The plan is for a nationwide network of 70. There must be some cannibalisation between the store formats, though Carpetright says not.

Lord Harris has ruled out a special dividend or share buy-back, preferring to use the pounds 13m cash pile for store openings and a progressive dividend policy.

With only half its target market share figure in the UK, there is still plenty more to go for in the domestic market.

The forthcoming flotation of Allied Carpets will add to competition, though Carpetright says it will give the sector more visibility.

Investors who bought Carpetright shares when they floated at 148p three years ago have seen their investment rise fourfold.

With the shares down 29p to 594p yesterday and analysts forecasting profits of pounds 36m this year, they are trading on a slightly more sensible forward rating of 18. Fair value.

Hazlewood to savour growth

Things could be looking up for Hazlewood Foods, the mixed bag of food companies which includes ready- made meals and pork and potato production. The company sounded a long- awaited note of optimism yesterday. The feeling is that last year's nightmare of rising raw material prices and inability to pass on price increases to retailers is now easing.

If this is a recovery, it would not be before time. The shares have been an appalling investment, underperforming the market by 65 per cent in the last five years.

The company's problem has been a ragbag of often unrelated businesses that were too small to achieve market dominance. Management have now sold volatile businesses such as shellfish and ice cream though the paper and nappy businesses have yet to be offloaded.

But five or six years of re- structuring is beginning to pay off. The company bounced back to profits of pounds 34m in the year to March. This compared with the previous year's pounds 37m loss caused by restructuring provisions. More encouraging is the 4 per cent rise in like-for-like sales. Margins are also improving, rising from 4.9 per cent to 5.3 per cent. Price rises have started to stick. In convenience foods and ready-made meals there is a push towards higher-value, higher- margin ranges.

Problem areas include the meat and deli business which is being hammered by rival Unigate's pork division. Profits fell by a third last year and the BSE scare will knock around pounds 2m off the bottom line this year.

There is still an over-reliance on commodity businesses. And unlike most food groups, Hazlewood is moving closer towards the major supermarkets, which now account for 45 per cent of its business.

In the short term, Hazlewood should benefit from the more benign market conditions. But further out its exposure to supermarkets is still a worry. BZW is forecasting profits of pounds 37m this year. With the shares unchanged at 102p, they trade on a forward multiple of nine. Hold.

First Leisure slow but sure

Investors who demand instant results should probably shy away from First Leisure, the kind of company for which the concept "medium- term" could have been invented. But patience is its own reward, and the company's careful, moderately aggressive strategy looks as if it will bear fruit in time.

Pre-tax profits were up 5 per cent to pounds 18m in the six months to April but stripping out asset disposals the figure was flat at pounds 16.5m.

The National Lottery and scratch cards have taken their toll on discretionary spending, which affects all First Leisure's divisions such as bingo, bars and bowling. But compared with rival leisure companies, First Leisure has performed creditably. The company is hopeful that the drop in scratch card sales will free up more cash for spending on other leisure pursuits.

First Leisure has also made good use of its cash flow, expanding its Brannigan brand bars, its Riva "new style" bingo halls and its lucrative night clubs. All three areas are good profit centres, and the company has earmarked another pounds 50m in the next 18 months to build even more sites.

Longer term, the company may want to sell non-core assets, such as the rather tired resorts at Blackpool. But for now at least, they throw off useful cash.

With analysts expecting full-year pre-tax profits of pounds 43m the stock is on a multiple of 19 times, falling to 18 in 1997. The shares jumped 11p on the results to close at 369p. Hold.