Long-suffering investors in Carpetright have become used to regular profit warnings. However today’s problem is not the UK, but the Netherlands.

Long-suffering investors in Carpetright have become used to regular profit warnings. However today’s problem is not the UK, but the Netherlands.

The words Carpetright and profit warning have become inextricably linked, which is probably a function of the inherent volatility in UK household goods spending and the engrained optimism of the senior management at Carpetright.

It is, of course, very easy for consumers to make do with an old carpet when money is a bit tight, so the carpet market in the UK has been challenging for quite some time.

Carpetright rely on a heavy dose of regular Sale promotions to keep the consumer interested, although it is not easy to prove that these Sales offer genuine bargains and the Office of Fair Trading is on the case.

It is also not easy to get consumers to pay full price when the business is not on promotion, so the increasing volatility in weekly trading that Carpetright have seen recently may be symptomatic of a need to rethink the promotional approach.

However, to be fair, Carpetright is making some progress in the UK, thanks to a self-help programme of store revamps, an online push and the development of its beds and flooring range.

And the core UK retail business delivered a like-for-like sales increase of 2.5% in the 13 weeks to January 25, against a strong comparative of 4.7% growth last year, with gross margins firm.

And although the Netherlands may be a disaster, hope springs eternal that the recent flooding across much of the UK (quite apart from the pick-up in the housing market) will lead to a boom in carpet sales in a few months time.

However, today’s third-quarter trading update from Carpetright flags that a further deterioration in trading in the Netherlands has meant that Carpetright now expects full-year underlying pre-tax profit to be “below the lower end of current market expectations”. The consensus before today was for adjusted pre-tax profit of about £9.5m, but the message now is that group pre-tax proft will be £1.5m to £2m below that, because the Dutch business has now moved into loss.

Trading in the Netherlands was tough throughout last year, but the hope was that consumer confidence was bottoming out and that the business would do no worse than breakeven in 2013/14.

So the news today that it will probably lose over £1.5m is disappointing, even if it should not have been a massive surprise after last week’s figures out of its Dutch rival Beter Bed where like-for-likes were down 16% in the Christmas quarter.

Carpetright hasn’t been doing quite as badly as Beter Bed in the Netherlands, but it still saw an unhealthy double-digit like-for-like decline in the third quarter and it is not easy to make money with that sort of top-line performance.

What will Carpetright do about all this? Well, the three-point plan is to grow the gross margin by 100bps (through supplier support), cut store staff numbers and advertising costs and do more store revamps including more sample-only stores.

Other things being equal, these measures would see the Dutch business break-even in 2014/15, even if underlying sales stay flat, but that may be too optimistic if sales keep falling.

It must be frustrating for Carpetright that just as things are starting to look up in the UK, the business in the Netherlands has fallen into loss, which must say something about the differing economic cycles in the UK and Netherlands.

  • Nick Bubb has been a leading retailing analyst for over 30 years. He is a well-known commentator on UK retailing and is a founder member of the influential KPMG/Ipsos Retail Think-Tank.