Retailers Carpetright PLC (LON:CPR) and Debenhams PLC (LON:DEB) are both in the process of revamping their stores in an attempt to entice back the cautious UK consumer, but mixed updates today from the two small cap firms saw differing reactions from the City.
Carpetright shares were over 8% higher at lunchtime as weak full-year like-for-like sales growth was rescued by an improvement in the second-half and more encouraging trading at the start of the new financial year, particularly at its revamped stores.
READ: Carpetright posts drop in full-year profits but saw "positive trading momentum" in second half
The floor covering retailer’s CEO, Wilf Walsh said: “We have made an encouraging start to the new financial year, underpinned by the improving performance of our refurbished UK estate.
“While a challenging consumer environment and competitive landscape remain headwinds, we are confident the additional potential in our self-help initiatives will support an increase in market share.”
Neil Wilson, senior market analyst at ETX Capital, said: “The market doesn’t seem to be caving in. UK revenues were down a touch, but rose in Europe thanks to currency effects.
“UK profits were extra soft – down 40%, while they more than doubled on the continent thanks to the translation effect of the weak pound.”
Carpetright is turning things around
“But then,” he added, “Carpetright is turning things around, it says. UK like-for-like sales rose 2% for the seven weeks to 17 June 2017 as refurbished stores start to pay off. LFL sales at stores that have been refurbished are up 5% - a very encouraging sign that the programme is working.”
The analyst noted: “Investors are seeing this as a glass half full – shares leapt more than 11% on the open. But doubts remain with the stock down a fifth since April.”
WATCH: Carpetright's full year figures 'don't make for pretty reading', says ETX Capital's Neil Wilson
However, he continued: “Carpetright has suffered a serious decline since last June as investors shy away from companies whose chief exposure is to UK consumers. Any turnaround has to be viewed in the context of a very tough market that might get tougher yet as inflation climbs and wages fail to keep pace.”
Although a distributive trades survey published today by the Confederation of British Industry showed a modest improvement in retail sales volumes in June, thanks to the warmer weather, there was little to suggest that consumer caution is easing.
Squeeze on consumers is likely to get worse before it starts to ease
Howard Archer, chief economic advisor to the EY ITEM Club, said: “The squeeze on consumers is likely to get worse before it starts to ease.”
Archer added: There is some support for consumer spending coming from current decent employment growth, but it is questionable if this can continue in the face of weakened UK economic activity, increasing business uncertainty and concerns over the UK’s economic outlook.”
In contrast to Carpetright, Debenhams saw its shares fall by nearly 3% as the department stores operator’s third quarter sales decline disappointed investors and it warned full-year profits could be at the lower end of estimates if current volatile market conditions on the high street continues.
READ: Debenhams cautions over 'current market volatility' on the high street
Sergio Bucher, Debenhams CEO, who took over in October, said: "As industry data has confirmed, May was a tough month for retailers and we continue to see volatility in trading week to week.”
He added: “As a result we are focused on delivering cost control and self-help through our ‘Fix the Basics’ plan.”
Task for Debenhams boss looks more difficult
George Salmon, equity analyst at Hargreaves Lansdown said: “After choosing to leave his position at the top of Amazon’s European fashion division to take over as CEO at Debenhams, we can assume Sergio Bucher likes a challenge. However, the task in front of him now looks all the more difficult.”
The analysts added: “Recent figures from the ONS show sales volumes in the retail industry are growing at their lowest level for 4 years, and Debenhams is feeling the pinch. Trends in its key sales metrics have gone into reverse in recent weeks.”
There was some good news for Debenhams from strong digital sales growth, up 7.9% for the 15 week period to June 17 , and 12.6% for the 41 weeks to the same date, driven by mobile demand which was up 47% year-on-year.
Salmon pointed out: “The new CEO’s strategy, namely to improve the online offering, declutter the stores and step up the quality of the in-store service, seems sensible.
“However, Debenhams has struggled for years. Particularly in these difficult times, we feel investors should remember that it's one thing to correctly diagnose the problem and quite another to successfully apply the cure.”