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2 retail stocks I reckon could dive

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Flooring vendor Carpetright (LSE: CPR) has seen its share price dive to seven-week troughs in Tuesday business after furnishing the market with poor trading numbers.

Carpetright was last 7% lower after advising that “we have experienced tougher trading conditions over the last three months,” mirroring the misfortunes of much of the home improvement segment. And disappointingly the retailer noted that “the level of sales growth in our final quarter leads us to expect that full-year profits will be towards the lower end of the current range.”

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The Essex business estimates pre-tax profits for the year to April 2017 at between £13.9m and £16.2m.

Carpetright saw like-for-like sales growth of 1.4% in the 12 weeks to April 22, cooling from the 1.9% rise printed in the prior quarter and down from growth of 1.7% in the corresponding 2016 period.

And while the carpets colossus has accelerated its store refurbishment programme to encourage customers through the door (Carpetright overhauled 188 outlets by the end of the quarter, beating its prior target of 150) this is likely to provide only token relief as inflation aggressively picks up.

Indeed, latest Office for National Statistics data showed British retail sales fall 1.4% during January-March, the first quarterly drop since 2013. The body’s consumer price inflation gauge currently stands at three-and-a-half-year peaks of 2.3%.

City brokers had been expecting Carpetright to bounce from a predicted 13% earnings decline in the current fiscal year with a 15% rise in 2018. But signs that recent sales weakness is intensifying could lead to swingeing downgrades beyond the outgoing year’s estimates.

So while it deals on a P/E ratio of 12.3 times for the upcoming year, a very attractive reading on paper, this is still not low enough to offset the probability of heavy forecast cuts in the near term and beyond as the UK high street struggles.

Poised to reverse?

And of course rising inflation is likely to dent shopper appetite for particularly expensive goods like cars, making me extremely bearish over Cambria Automobiles (LSE: CAMB) in the coming months.

Exploding car demand has seen the retailer enjoy double-digit earnings growth during the past few years. Total British sales hit a record 2.69m units last year, according to the Society of Motor Manufacturers and Traders, and latest data has showed momentum still picking up steam. Indeed, sales in March surged 8.4% to 562,337.

But last month’s gallop can be put down to shoppers piling in before new vehicle excise rules kicked in during April. And with an economic slowdown appearing likely, and windscreen prices set to rise as manufacturers pass on the impact of sterling weakness, I reckon sales are likely to stall from spring onwards.

Reflecting these more difficult conditions, the City expects Cambria to endure a rare 1% earnings fall in the year to August 2017. Although this still leaves the retailer dealing on a cheap P/E multiple of 8.5 times, the chances of a prolonged downturn would encourage me to steer well clear.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK owns shares of Cambria Automobiles. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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