QUALIPORT
PizzaExpress Shares Could Fall To 300p

By Maynard Paton (TMFMayn)
July 8, 2002

Two weeks ago, Qualiport company PizzaExpress (LSE: PIZ) issued a sales warning. The restaurateur stated like-for-like (LFL) sales had declined by 1% during its second half. PizzaExpress shares responded by falling 27% to 450p. However, judging by the stock market's reaction to other speciality retailers encountering trouble, the shares could fall to 300p.

Here are three examples of retailers experiencing Mr Market's wrath following a sales slip-up. Like PizzaExpress, all were -- and still are -- widely regarded as industry leaders.

Carpet crunch

Qualiport member Carpetright (LSE: CPR) suffered a setback a few years ago. During the first half of 1998, Chairman Lord Harris stated the carpet market was "the most difficult" he'd ever experienced in his 40-year career. After years of double-digit increases, LFL sales growth was just 2% in 1998 and was a negative 3.5% during 1999. Between 1997 and 1999, pre-tax profits slumped from £32m to £23m.

During October 1998, Carpetright shares touched 171p. At that time, consensus estimates for Carpetright's near-term earnings and dividends looked like this:

To April 30th               1997       1998       1999(e)    2000(e)

Earnings per share (p)      27.9       25.7       23.9       24.8
Dividend per share (p)      19.0       22.0       22.0       22.3

Such was Mr Market's depression, the low point saw Carpetright shares trade on a forward price to earnings (P/E) ratio of 7.2 and offer a prospective dividend yield of 12.9%.

Sportswear slump

Just like Carpetright, JJB Sports (LSE: JJB) endured a tough 1998. In that year, the sportswear retailer bought sector rival Sports Division for £289m. Unfortunately, the purchase coincided with the sudden end of the sports clothing industry's rapid growth. Following a 16% improvement during the twelve months to January 1998, JJB's LFL sales were just 0.2% higher the year after. The performance of Sports Division was even worse. It recorded an 11% LFL sales decline in the first year of JJB ownership.

During November 1998, JJB shares fell to 90p. Here's what the brokers were expecting around that time:

To January 31st             1997       1998       1999(e)    2000(e)

Earnings per share (p)       7.7       12.7       14.8       18.7
Dividend per share (p)       2.2        3.4        4.2        5.2

The share price nadir valued JJB on a forward P/E ratio of 6.1 and offered a prospective dividend yield of 4.7%.

Hobby hitch

Portfolio watch list constituent Games Workshop (LSE: GAW) issued a profit warning two years ago. The wargaming firm blamed Pokemon for a 15% decline in LFL sales during early 2000. Things got worse later that year, as a further sales decline prompted a complete overhaul of the business. Problems concerning the boardroom, stock management and the supply chain were eventually resolved (after some chunky exceptional charges) in 2001, but not before the share price had taken a battering.

During October 2000, Games Workshop shares hit a 101p low. Broker forecasts around at the time are shown below:

To May 31st                 1999       2000       2001(e)    2002(e)

Earnings per share (p)      25.8       20.3       19.6       24.9
Dividend per share (p)       9.7        9.9       10.2       10.9

At the bottom, Games Workshop shares rested on a forward P/E ratio of 5.2 and offered a prospective dividend yield of 10.0%.

Similarities

There are numerous similarities between these three companies:

1. They're all retailers;

2. They all floated during the early-to-mid 1990s;

3. They all underwent rapid expansion after flotation, notching up impressive LFL sales growth performances;

4. They all hit trouble for one reason or another, as evidenced by flat or declining LFL sales;

5. They all suffered from ridiculously low valuations as the stock market assumed their growth stories were finished... and;

6. They all subsequently recovered, as their leading industry positions and experienced management supported a turnaround.

(Excluding dividends, investors getting in around the low points would have made 250% on Carpetright and JJB, and 350% on Games Workshop.)

PizzaExpress at 300p?

Of the above similarities, numbers 1 to 4 fit PizzaExpress perfectly. However, in terms of number 5, we're yet to see a depressed PizzaExpress valuation on a parallel with the three examples.

To June 30th                2000       2001       2002(e)    2003(e)

Earnings per share (p)      36.2       42.9       39.0       42.1
Dividend per share (p)       6.7        8.4       10.0       12.4

And similarity number 6? Well, nothing is ever certain. However, on the surface at least, PizzaExpress does possess the qualities to see through the current downturn in the central London restaurant trade.

Bottom line? If the three examples are anything to go by, PizzaExpress shares have room for further falls. Although the share price lows of Carpetright, JJB and Games Workshop were possibly exacerbated by gloomy stock market conditions, it would not be impossible for PizzaExpress to plunge to those sorts of single-digit P/E multiples. Such pessimism could see PizzaExpress shares trade as low as 300p -- a mouth-watering prospect for canny investors. Although PizzaExpress shares remain good value at the moment, there's a distinct possibility Mr Market's unforgiving attitude towards stumbling retailers could see them fall a lot lower.

The author owns shares in Carpetright, Games Workshop and PizzaExpress.