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This small-cap is down over 40% since January. Is it one to buy or avoid?

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I like to keep an eye on the small-cap stocks to see if there are some potential opportunities to be had. One of these is Topps Tiles (LSE:TPT). Is the UK’s number one tile retailer worth considering or are there better alternatives out there?

Small-cap opportunity or not?

TPT has a store network of over 300 locations across the UK with approximately 1,500 employees. It specialises in what it calls ‘large edge-of-town store formats’. This basically means it tends to operate in larger premises that may not be directly in town centres. The retailer does have a retail and trade arm. The latter allows it to carve out a customer base in the construction industry.

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Recent times have not been great for Topps Tiles’ share price. It has fallen over 40% from the beginning of the year. It currently trades at just over 40p per share. This is still somewhat better than its lowest ebb in mid March when shares were trading at 25p.

Aside from its share price woes, performance over the past few years has not been the best for TPT. The small-cap has seen nearly 75% of its share price erode over the past five years.

This decline has coincided with Brexit uncertainty affecting demand for TPT products. Furthermore, sinking consumer confidence has impacted sales figures. If you now add that the Covid-19 pandemic will surely affect sales too, there could be further issues ahead.

Trading update and recent performance

Topps Tiles released a third-quarter trading update at the beginning of July. In the report, it confirmed that the majority of its stores had fully reopened by the end of May. Retail sales improved as the quarter progressed. Average sales per week grew from £0.8m in April (when all stores were closed) to £3.9m in the final week of June when all stores were trading.

Overall, sales for TPT were down 16% compared to the same period last year. Activity for the small-cap business increased in June as more construction companies returned to work.

TPT boosted its liquidity in Q3 as it sold and leased back its central office and warehouse facility. This resulted in an £18.1m windfall. Its period-end available cash sum of over £50m gives TPT some headroom to ensure it can survive the potentially tough months that lie ahead.

What I would do

I do like Topps Tiles as a business and a small-cap alternative to bigger businesses. It is a tried and tested business model which has been operating for over 50 years. I must admit its current low price and extremely attractive dividend yield of over 5% are enticing. It is also recovering from the lockdown and sales are slowly increasing. Its last full-year results were positive despite what it described as a ‘tough market’.

The reasons outlined above are all moot unfortunately in my ultimate decision regarding TPT. The fact that its financial performance is inextricably linked to the property market does not fill me with confidence. Political and consumer uncertainty surrounding Brexit, in addition to the pandemic, are huge factors in my thinking. I would avoid Topps Tiles right now. Overall, I feel there are better opportunities out there, especially if you are looking for small-caps to invest in.

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Jabran Khan has no position in any of the shares mentioned. 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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