1. Forget biotech, smartphone apps and oil exploration, this year’s top performing UK stock is a carpet retailer

Forget biotech, smartphone apps and oil exploration, this year’s top performing UK stock is a carpet retailer

Forget biotech, smartphone apps and oil exploration -- this year’s top performing U.K. stock hails from an altogether less glamorous background: the humble world of carpet retailing.

By: | Published: February 6, 2017 6:34 PM
For a start, Carpetright shares had a long way to rebound: the stock fell about 90 percent in a decade as the retailer’s model of selling cheap carpet from big-box stores became outdated. (Reuters) For a start, Carpetright shares had a long way to rebound: the stock fell about 90 percent in a decade as the retailer’s model of selling cheap carpet from big-box stores became outdated. (Reuters)

Forget biotech, smartphone apps and oil exploration — this year’s top performing U.K. stock hails from an altogether less glamorous background: the humble world of carpet retailing.

Carpetright Plc shares were up 43 percent in the first 34 days of 2017, putting them just above Kaz Minerals Plc and Gulf Marine Services Plc at the top of the FTSE All-Share Index rankings. Fellow retailers Next Plc and Pets at Home Plc are among the index’s biggest laggards.

So why has a drab floor-coverings seller gained more than a Kazakh copper miner that’s benefiting from a surge in metal prices? For a start, Carpetright shares had a long way to rebound: the stock fell about 90 percent in a decade as the retailer’s model of selling cheap carpet from big-box stores became outdated. To change that, Chief Executive Officer Wilf Walsh is opening smaller stores and revamping the product range, and the Jan. 31 announcement of a return to domestic sales growth showed some positive early signs.

“The strategy being adopted by management can materially improve the performance of the business and help deliver stronger shareholder returns,” George Mensah, an analyst at Shore Capital, said in a note.

That strategy also involves a program of store refurbishments and measures to improve customer service after Carpetright acknowledged last year that its reputation and trust hadn’t ranked highly with consumers “for an extended period.” Lucy Alexander, the star of a BBC television show about home renovation, was brought in as a “brand ambassador.”

Last week’s third-quarter update indicated that the moves are producing results. U.K. like-for-like sales rose 1.9 percent in the 13 weeks ended Jan. 28, including growth of 6.8 percent in January. The retailer also reported better-than-expected results in its smaller non-U.K. division of the Netherlands, Belgium and the Republic of Ireland.

Walsh said the company was confident in its plans and “comfortable” with the range of analyst profit estimates for the year through April. About 150 out of 427 U.K. stores will have been refurbished before the close of 2017.

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Whether the revival can be maintained is open to question. The outlook for the U.K. consumer “remains uncertain,” Walsh said last week, echoing comments made by most British consumer and retail companies since the U.K. voted to leave the European Union last year. Carpetright also faces new competition in the shape of a chain called Tapi, set up by Martin Harris, the son of Carpetright founder Philip Harris. Closely held Tapi has expanded rapidly since opening its first store less than two years ago and now has more than 70 outlets.

Still, those risks may be priced into the shares, which even after their recent spurt trade at only 12 times estimated earnings for the year ending in April. “At the current price and valuation, we believe there is significant upside,” said Mensah, who has a buy rating on the stock.

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