Carpetright store in the high street

Will Carpetright’s Shares fly again?

Carpetright PLC has been a dog for large part of a decade, as its shares collapsed from the peak of £13/share to as low as £1.50/share. It currently trades above £2/share.

Is there hope for Carpetright or will it end up in the scrapheap?

 

Brief Background

This flooring company set up shop in 1988 in Canning Town and quickly expanded its operations. By 1993, it got listed on the London Stock Exchange. And in 2008, it bought Sleepright PLC to expanded the firm product range to include beds.

 

The story so far

Looking back at Carpetright’s financial data, you see stagnating sales for the past 12 years. Meanwhile, operating profit took a dive from £74.4m in 2004 to £14.8m today, meaning it was selling more in volume but at a lower price (= lower margins).

But over this difficult period, there are some signs of life as the carpet seller took the liberty to reduce leverage and be cash conservative by stopping dividend payments since 2011.

There could be life in this old dog if turnaround plan is successful.

Therefore, it is worth analysing for investment opportunities.

So, hang on to your seatbelt!!

 

Profits Recovery?

There was a period when Carpetright PLC was making operating losses. It was during 2012 and 2013 that resulted in £3.4m and £4.9m of net loss, respectively, before recovering to earn £14.8m in net profit in 2016.

Like the share price, these profitability ratios looked horrendous from 2006 to 2014, but the last two years saw big improvements see table below:

CARPETRIGHT PLC's Profitability ratios over 10 years

Source: Carpetright’s annual reports.

Some of these ratios such as the Dupont’ ROE and Greenblatt’s Return on Capital are turning GREEN, signalling an improvement in its operations and higher returns on capital invested.

 

Debt Sorted?

To Carpetright credit, management decides to pay off interest-paying loans which saw debt reduced from £108.3m to £7.7m in seven years. The reduction in debt isn’t easy to achieve with the company deciding to ditch some assets (closed or sold off some stores), cancel dividends and hire less staff.

The result is the great deleveraging process:

Carpetright plc historical deleveraging of Debt to Equity and Debt ratio

Source: Carpetright’s annual reports.

Debt to Equity fell from a peak of 160% in 2009 to 10%, while its debt ratio declines to new lows signalling a bigger contraction of total liabilities against total assets.

Also, the retailer made £14m in operating profits that easily cover net finance costs of £2m, which is 7X over.

All of the above is good news, but did it change the company’s Net Debt position?

 

Carpetright's Net Debt

Source: Carpetright’s annual reports.

The conventional measure saw net debt completely disappeared from their financial statements. However, the best analysts take into account accruals assets and accruals liabilities. And, calculating Net Debt means doing some extra calculation by adding receivables to cash and payables to debt, this resulted in net debt reaching £100m meaning Carpetright owes suppliers this amount.

 

 

Cash Conversion Efficiency

Carpetright’s management manages to improve the company’s credit policies as receivables decline from 28 days to 16 days. It manages to hold inventory steady, and there is a slight improvement in payables.

Overall, this leads to an increase in cash cycle days from negative 170 days to a negative 140 days (a level was last seen in 2004).

Carpetright Plc cash cycle

 Source: Carpetright PLC’s annual reports.

The way investors should measure cash cycle (days) is to find a level where the firm is earning money and able to pay back their suppliers at a reasonable time. The reduction in Carpetright’s cash cycle days’ signal to investors the firm wants good relations with suppliers.

 

Is this the right time to invest?

We got to understand where the company at in their business cycle. Right now, the cycle is in the maturing stage meaning it fulfil its potential (given its wares and branding), and is downsizing and optimising at a steady pace.

That strategic direction is good for the business because they taking stock of the sector competitive nature. Plus, if rivals fails or downsize, then Carpetright will be there to take market share.

Carpetright plc historical store numbers

Source: Carpetright PLC’s annual reports.

That downsizing started after the financial crisis and continued to this day. Now, store numbers are down by 131 from its peak 703 to 565 (lowest level since 2007).

 

But, what you invest in a company with no sales growth?

Well, depending on margins improvement, and so far, this been happening since 2014, but will they keep it up? 

WH Smith, is an example of a business that Carpetright wants to emulate as WH Smith successfully increase profits on stagnating sales figures and is highly-rated in the market.

 

Carpetright’s market cap is £158m, but at one point it touches £1bn. Back then, it was making Net profits of £40m to £50m at 10% margins. Theoretically, if Carpetright gets back to earning these numbers then future P/E ratio will be 3-4 times, and the share price (once touched £13/share) gets re-rated higher!  

At the moment, net profit is £14m before exceptional charges and the projection for this year is between £14m to £19m.

 

Market Metrics Valuation

Despite the debt reduction and improvement in cash conversion, the market has not responded to the possible turnaround.

Carpetright PLC historical valuations on Sales and Assets

Source: Carpetright PLC’s annual reports.

These are at record low numbers. Both its assets and sales are marked below 1, when the share price averages £2.56/share. Today’s share price of £2.05/share makes these valuation levels go even lower!

 

LATEST RESULTS FROM CARPETRIGHT PLC

Management plans to upgrade its 100 stores at the cost of £10m within a year. And this is successful as the company see 9.1% L-F-L sales growth in new concept stores.   However, they warned of competition with the number of stores continuing to decline as 25 unprofitable stores closed down.  

The interim results continue to decline for sales, but consensus underlying profits before tax (ignoring exceptional charges) is between £13.9m to £18.5m.

Their Q3 trading update shows like-for-like growth of 6.8% for the first four weeks of this year, but for the 13 weeks to the end of January 2017, group sales grew by 3.7%.

 

 

Technical Chart of Carpetright

Carpetright’s weekly chart looks like a car crash.

Carpetright PLC weekly share price chart

No definitive patterns are showing from MACD and RSI, so I won’t speculate on the direction but looking at the monthly chart:  

Carpetright PLC monthly share price chart

(P.S. I added an extra year to suggest a possible pattern recognition.)

First, in the past seven years, Carpetright’s momentum indicators have been oscillating in the negative half as the share price decline.  

Secondly, there has been several occasions where the share price rebounded. Here are the details:

DATERSIMACDShare Price
01/09 – 01/10Moves from 30 to 60Moves from -170 to +25From £3.11/share to £10/share.
11/11 – 09/13Moves from 33 to 52Moves from -75 to 0From £3.74/share to £7.16/share.
09/14 – 06/15Moves from 29 to 57Moves from -60 to -10.From £2.98/share to £6.29/share.
01/17???

(P.S. Dates are approx.)

All three-accompanied stock price rebound periods showed huge moves of 100%+ to 200%. Also, with monthly momentum indicators close its lows, is there a chance Carpetright will see its share price making another upwards surge?

Only time will tell.

Remember, you are looking at Carpetright’s month chart, where it could make another new low from the current low of £1.50/share and could signal a sharp turnaround for the shares.

 

Carpetright’s share price forecast

Given the market value is roughly £180m and the recovery likely to continue, then you are forgiven for taking a punt in Carpetright PLC.

Based on the company underlying profit projection of £15m-£19m and its long-term technical chart layout, I would say these levels represent a buy and target £4/share for the next 15 months.

However, there is another direction the share price could move, and that is a quick decline below £1.50/share, before rising. That signal is a stronger confirmation to the upside with a possible target price of £6/share.

 

Remember to check Carpetright’s monthly chart with MACD and RSI indicators.  

 

 

Disclosure

The opinions are expressed independently by the writer for entertainment and research purposes and not taken as investment advice. Data is correct on available information at the time.

Finally, the writer does not own the company’s stock, unless stated otherwise.

 

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