Hobson: Carpetright Was a Close Call

THE WEEK: Morningstar columnist Rodney Hobson harks back to 2014 when he was tempted to buy shares in Carpetright, whose shares plunged again this week on another profit warning

Rodney Hobson 2 March, 2018 | 3:06PM

Carpetright Shares Plunge

Towards the end of 2014 I was sorely tempted to buy Carpetright (CPR) shares. Britons were putting the financial crisis behind them, employment was increasing and the housing market, particularly in London, was quite buoyant. Carpetright seemed to be on a roll that was reflected in the rising share price.

It was only my antipathy for retail stocks that stopped me. Carpetright is particularly vulnerable to changes in consumer confidence and any squeeze on wages, since each purchase can run to hundreds if not thousands of pounds. Every customer who decides not to splash out has a big impact while an awful lot of storage space is required whether sales are made or not.

Carpetright shares have been on a downward slide for the past three years. The last time this happened, founder Lord Harris was young enough to step up to the carpet square and sort it out. The company just doesn’t seem able to cope without him and I can’t blame him for resting on his laurels this time.

This week’s profit warning revealed that the company is now lossmaking and it will have to go cap in hand to its banks. The shares have fallen off a cliff twice this year already and it’s only two months old. They have lost 90% of their value since the end of June 2015.

Even so, in my view it is not too late to get out. I say that with sympathy for those unfortunate souls who have held on in vain hope. It could so easily have been me.

Merlin May Regain the Magic

It was no fun for theme park operator Merlin Entertainment (MERL) when visitor numbers were cut by terrorist activity and poor weather last summer but life seems to have turned around dramatically. The reason is that Merlin has enough variety in its portfolio of 120 attractions, 15 hotels and six holiday centres to withstand shocks to parts of the business. It is spread over 25 countries, which also provides a cushion.

So visitor numbers fell at the London Eye and Madame Tussauds last year – London visitors slumped 17% - but Legoland managed to pull in the customers, as did hotels. Revenue for 2017 was up 11.6%, with total visitors hitting a record £66 million, and pre-tax profits rose 4.8%. The dividend total edges up from 7.1p to 7.4p.

Alton Towers, where five people were seriously injured in 2015, is still not back to where it was but visitors are returning slowly and unless there is another terrorist attack in the capital we should see an improvement there as well this year. New attractions are being opened in the UK and elsewhere.

Merlin shares peaked at 537p in June before sliding to 320p last month, a decline of 40%. Much of the damage was done by an over-reaction to a trading update in October that was disappointing rather than disastrous. Over the past month, however, they have edged up to 370p.

One should approach such an investment with caution. So much can change quickly and Merlin is committed to heavy spending on new theme parks over a number of years, spending it cannot just drop if revenue is hit. Last year started with some positive momentum that soon petered out. If this week’s heavy snowfalls across Europe are followed by a sunnier summer, the reverse could happen this year.

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
Carpetright PLC27.94 GBX-0.21-
Merlin Entertainments PLC402.10 GBX0.37-
About Author Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.