Carpetright, one of the best managed retailers in Britain, has released a positive trading update. Could this mean the retailing slump is over?
Consumers have maxed out their credit cards and just can't go shopping much any more. Retailers are, therefore, in trouble. That is what a lot of investors are saying.
It means, however, that investors should be running their slide-rules over the retailing sector because businesses that are suffering can show good share price movements upwards when profits eventually recover.
Share price and profit increases can be all the more dramatic for retailers which are usually highly operationally geared. This was pointed out in the last week's lacklustre interim results from retailer Clinton Cards
(LSE: CC)
. It means that a small decrease in sales can lead to large decreases in profit. Conversely, as things improve, large increases in profits can be expected and the share price should follow upwards.
One retailer that has done extremely well over the years is Carpetright
(LSE: CPR)
which released a trading statement this morning. In the UK and Ireland, like-for-like sales are up 0.3%, but total sales (which include newly opened stores) are up 5.9%. For its other European operations, like-for-like sales are up 3.6% and total sales have increased 9.1%. In addition, the gross margin has improved by 2%.
This is a turnaround for Carpetright, because its most recent financial year, ended 30 April 2006, was a difficult one. For the first time in many years revenues and profits fell by 2.4% and 11.8% respectively.
Lord Harris, Chairman and CEO, explained that a weak housing market and low consumer confidence were the causes. Now though, the much talked-about crash in house prices has not materialised and perhaps consumers are feeling more confident.
This could mean that the slowdown in retailing is over. There is some evidence for this. For example, in its recent interim results, Tesco
(LSE: TSCO)
saw a 10% increase in UK sales. Sainsbury
(LSE: SBRY)
also saw a rise in like-for-like sales of 6.5%. But then perhaps neither of these examples are significant - Tesco has shown steady improvement for years and Sainsbury is recovering from its own particular, self-inflicted problems.
If last year's downturn is over, and I'm not convinced that it is, is Carpetright is a good buy right now?
In the last few years, Carpetright has posted fantastic results. The share price has risen strongly and, as a result, the company is trading on an historic multiple of 22 and a prospective one of 18.
This looks expensive especially given that the PEG ratio is a lofty 1.72 - under 0.7 is usually considered cheap. I won't be buying at the moment.
More on retail shares:Bargain Share Alert | Retail -- A Game Of Two Halves
