What to make of Carpetright?

“Fitted carpets are not the most obvious thing to sell online, or in a supermarket.”

Pre-tax profit is up at Carpetright, in fact, it doubled year-on-year to the end of April. However, it only managed that by selling and leasing-back nine of its stores. It has traded since 1988 and is still one of the largest retailers of floor coverings in the UK, with 490 stores. It lost 49 outlets in the past year: a third of these were concessions in Focus DIY outlets which had to close when Focus entered administration. It is also, perhaps, the best known brand in this sector.

Although it had a headline profit of £13.6M, underlying trading profit was only £4m, down 76%, on sales of £471.5m, which were down 3.1%. The property sales also helped it reduce net debt from £65.7m to £19.1m which seems a pretty sensible move when cash must be under pressure. There appear to be opportunities to trim the estate even more over the next five years as a further 88 leases expire.

Three-quarters of Carpetright sales come from the UK, where the sluggish property market and the recession combined have significantly reduced homeware purchases. House moves generate significant new carpet sales and more people are staying put at the moment.

So what to make of Carpetright? Well, to my mind it is doing the right thing to batten down the hatches as this recession isn’t going away any time soon. Steve Kean, famed alternative economist, said recently that he thought we were only about 30% into the economic mess we find ourselves in, as the debt overhang is just too big to recover from in the short term. With a dominate market position and a fairly clean balance sheet Carpetright seem to be in a position to survive until things get better again, whenever that is.

Unlike electrical goods, books, and many other consumer purchases, that have migrated online, carpets are going to be one of the “bricks” survivors. I think we’ll still see them on high streets and out of town and it also looks likely that supermarket chains will leave carpets well alone too. This is all good for Carpetright. Unlike The Game Store and HMV who found themselves forlorn market leaders when sales had migrated elsewhere, Carpetright is arguably the market leader and it is unlikely that the sales model for carpets is going to change much.

On top of all this, the movement of retail activity away for the high street will mean that when leases expire Carpetright may well find itself with downward moving property costs that will improve its margins too. So, all looks good for Carpetright, eventually. Even if there is a material downward readjustment in house prices Carpetright will benefit from the increased activity in the housing sector that results.

Carpetright are likely to be one of the survivors of both the recession and the rebalancing of retail towards “clicks” and away from “bricks”. Where I once feared that British high streets would just have Weatherspoons, MacDonald’s and pound shops in the future; I now confidently expect to see the odd carpet shop too.

Mark

 

 

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