QUALIPORT
Value Shares For Easter

By Maynard Paton (TMFMayn)
April 17, 2003

Qualiport shares Carpetright (LSE: CPR) and DFS Furniture (LSE: DFS) look cheap. If you believe the forecasts, at 590p, Carpetright (read more) rests on a prospective price to earnings (P/E) ratio of 10.4 and offers a 6.4% yield. At 334p, DFS languishes on a P/E of 9.2 and offers a 7.3% yield (read more).

The low ratings stem from fears of a slowdown in consumer spending. There are also many signs of a housing crash, which for retailers of home furnishings is unfortunate, since when people move home, they tend to replace the carpet and their old furniture.

Nevertheless, the Easter weekend provides home furnishing chains with their busiest time of the year. DFS reports its half-year figures next Thursday and investors could well find the stock market's fears are overdone.

Rivals

Even so, with Carpetright and DFS shares in the doldrums, it's worth reviewing what's happening elsewhere in the sector. Could the Qualiport pair be lagging their rivals?

Unfortunately for Carpetright investors, monitoring the company's relative progress is difficult, since it has no direct, listed rivals. At the last results, like-for-like sales were said to be running just 1.5% higher. However, the company does remain a clear market leader; Carpetright has a 22% UK market share, while Allied Carpets has 8%, other multiples 6%, department stores 4% and independent operators 60%.

Furniture retailers present the opposite problem. There are plenty of quoted benchmarks for DFS, yet the wide variety of furniture sold (kitchens, sofas, dining tables, wardrobes and so on) makes trading comparisons very tricky. For the record, DFS claim they're the country's largest upholstered furniture retailer, with a 15% market share.

Alongside Carpetright and DFS, the table below lists five other major players in UK home furnishings:

Company           Year to    UK Home Furnishings
                              Sales     Profit 
                               (£m)      (£m)

MFI Furniture     Dec 2002    861.4      37.7
DFS Furniture     Jul 2002    462.2      53.1
Marks & Spencer   Mar 2002    373.3   not disclosed 
Carpetright       Apr 2002    361.5      52.0
Courts            Mar 2002    253.6       7.4
Homestyle         Feb 2002    245.8      19.6
ScS Upholstery    Sep 2002     97.7       9.8

Here's a quick rundown of the Qualiport rivals:

MFI Furniture (LSE: MFI): Now successfully recovered from a dreadful spell in the late 1990s. As well as selling kitchens, bathrooms and the infamous flat-pack furniture, MFI's business includes joinery outlets and retail chains in France. An update in March showed same-store UK retail sales up 8%, with orders at the recently acquired Sofa Workshop up over 10%. An update in April revealed a possible £29m VAT charge relating to structural guarantees.

Courts (LSE: CRTO): Operates over 350 home furnishing and electrical stores throughout 20 different countries. In the UK (about 40% of group sales), disruption relating to the division's recovery programme caused autumn like-for-like sales to fall 12%. However, winter sales rebounded 9.3%. 

Marks & Spencer (LSE: MKS):  The daddy of UK retailing and another firm on the recovery trail. While clothing revenues remained flat, fourth-quarter 'home' turnover jumped 9% (read more).

Homestyle (LSE: HME): The owner of furniture, bed, and home textiles chains. Following a 2% like-for-like top-line improvement over Christmas, furniture sales deteriorated in February. The company is saddled with too much debt and, like MFI, is also involved in a structural guarantee VAT wrangle (likely cost: £23m).

ScS Upholstery (LSE: SUY): The only one of the five to focus on one particular area: upholstered furniture. The only one of the five also not to have experienced a profit upset in recent years. A February progress report revealed underlying orders up 7%.

Of the five rivals, ScS looks by far the most attractive. It specialises in one retail sub-sector and operates in just the one country, two features that reduce the scope for operational mishaps considerably. At 173p per share, ScS sports a P/E of below 7 and a 7% yield. Similar to Carpetright and DFS, ScS has no structural guarantee VAT surprise lurking.

Problems?

Does this quick recap show any trading problems at Carpetright or DFS? Well, Carpetright looks to be lagging a little, while DFS, whose latest trading update revealed like-for-like sales up 7% (but slowing), seems to be holding its own. Given the lack of listed rivals (carpet) and variety of players (furniture), it's difficult to make any firm conclusion.

Nevertheless, taking a longer-term view, the market leadership of the two Qualiport companies (leading to greater economies of scale, keener pricing and so on) should go some way to creating future sales momentum and a decent competitive advantage. But make no mistake: Carpetright and DFS are not business 'franchises'. It will be boardroom talent that ultimately rewards their buy and hold investors.

There may be some economic/property market trouble ahead, but the experienced Carpetright and DFS management teams have been through many downturns before. Indeed, both shares appear to have some sort of profit disaster priced in already.

The author owns shares in Carpetright and DFS Furniture.