Financial Analysis Carpetright Bills Itself as Europe\'s

Financial Analysis

Carpetright bills itself as Europe's "leading specialist carpet and floor coverings retailer." The company earns most of its revenue in the United Kingdom (80.1%) with the remainder coming from operations in Ireland, Belgium and the Netherlands. The group opened its first store in 1988 and now has 632 stores and over 3300 employees. This report is going to be a comprehensive analysis of Carpetright's financial situation.

Five Year Summary

Yahoo! Finance (2012) provides data for the past four years. Carpetright has seen volatility in its revenues over this period. In fiscal 2007, the company had revenues of £476 million, and this past year revenues were £471.5, so very little change. The company has added nearly 100 stores in that time, so the average sales per store has declined. The company's sales grew in 2008, fell in 2009, recovered in 2010 and then fell again in 2011 with the new recession. The carpet business is correlated with activity in the housing markets and the state of the economy in general. Chairman Lord Harris of Peckham noted in his annual statement that he had expected challenging trading conditions in the past year and the decline in revenues bears that out.

3.2

The company's profit in 2012 was £11 million. This figure is the weakest in the past five years. While Carpetright has remained profitable through the poor economic conditions, it made £46 million in fiscal 2007. 2008 was also a successful year with £43 million in profit, but the difficult 2009-year saw profits drop to their current range for the past three years. The company will be challenged to restore profit margins to the pre-2008 levels once the trading conditions improve.

Year

Operating Profit

Change (%)

Net Profit

Change (%)

2008

£54

£43

2009

£22.3

-58.7%

£11.8

-72.5%

2010

£28.2

+26.5%

£15.8

+33.9%

2011

£21.2

-24.8%

£4.6

-70.9%

2012

£8

-62.3%

£11

+139.1%

3.3

The company earned 16.4p per share in fiscal 2012. This represented an improvement from earning 6.8p per share in fiscal 2011. Earnings were higher in years previous, with EPS at 31.6p per share in 2010, 18.2p in 2009 and 63.5p in 2008. Clearly before the recession, the company was not only earning healthy revenues but earned much better margins, and was able to deliver EPS performance. The same can be said for dividends. The company in 2008 paid a dividend of 52p per share to its shareholders. This declined to 8p, 16p and 8p in the subsequent three years. It did not pay a dividend in fiscal 2012. The struggles that the company has dealt with in the face of a difficult economy have forced it to suspend its dividend, perhaps until overall economic conditions improve.

Income Statement

5.1

Though Carpetright has remained profitable through this challenging time, it has seen its profitability decline overall. The gross margin in fiscal 2012 was 58.5% and in 2011 it was 61.2%, 61.1% in 2010 and 61.2% in 2009. The slight decline last year reflects a decline in pricing power as the company discounted in order to move out inventory. Faced with high operating costs, the operating margin was just 3.8% in 2012. In 2011 it was 2.2%, but in 2010 it was 5.45% and in 2009 it was 4.6%. These figures indicate that Carpetright's costs have increased faster than its revenues. However, it speaks well to the company's financial management that after predicting a difficult 2012 the company cut overhead costs and increased its operating margin. The net margin is a reflection of the net profit, which has been poor for three years running. In 2012, net margin was 2.3%, whereas four years ago it was 2.4%.

5.2

The percent annual change in revenue from 2011 to 2012 was a decline of 3.1%, a decline of £15.3 million. This was calculated as (486.8 -- 471.5) / 486.8. The decline was attributed to general weakness in the industry and the UK economy.

5.3

According to the company's website, Carpetright has a market share of 24.1% in the UK. There has been concern of late that the company is beginning to lose market share since that figure was first reported by the company (Fletcher, 2011). The decline in revenue hit the UK market particularly hard. If the total market fell along with Carpetright revenues, it might have maintained its share despite the difficulties. However, there is a risk with any revenue decline that the company is losing market share.

The latest annual report notes that the company believes it is gaining in market share in Belgium and the Netherlands due to the struggles of competitors in those markets. The company did not provide a number to support this claim.

5.4

The gross profit margin in 2012 was 58.5%. This is down from 61.2% in 2011. The formula for gross margin is gross profit / revenue. The gross profit was relatively stable in the preceding three years so this downturn is somewhat alarming.

5.5

Profit from operations is £8 million for 2012. This is comprised of f2.8 million for the UK and £5.8 million for the rest of Europe. This was down from £21.2 total underlying operating profit in 2011. The company generated £29.1 million in cash from operations in 2012 and £36.5 million from operations in 2011.

5.6

In the annual report, the company notes that its total costs to employees and directors included wages, salaries, social security, post-employment benefits and share-based payments. In 2012, these costs were £98 and in 2011 these costs were £102.1 million. This represents a decrease in staffing costs of 4% for 2012. These costs were 20.7% of revenue in 2012 and 20.9% of revenue in 2011.

2011

2010

Staff Cost

£98

£102.1

Revenue

£471.5

£488.5

Control of Staff Cost

20.7%

20.9%

5.7

The formula for return on capital employed is EBIT / Total assets -- current liabilities (Investopedia, 2012). For fiscal 2012, this was £8 / (277.2-119.8) = 5.08%. The equivalent ratio in 2011 was £21.2 / (241.9 -- 98.7) = 14.8%. The primary difference between these two figures in that the EBIT (operating profit) was significantly higher last year than this year. This higher figure represents a greater level of efficiency in converting revenue to profit.

2011

2010

EBIT