Carpetright’s recovery still has hurdles to clear, and Gear4Music is out of tune

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“Geopolitical tensions weighed on the markets on Tuesday after the US imposed new sanctions on Iran. Stocks across the UK, Europe and Asia took a dive, with investors switching their attention once again to gold as a safe-haven asset,” says Russ Mould, Investment Director at AJ Bell.

“The precious metal traded 1% higher at $1,433 per ounce. Gold miners were understandably in demand, including Centamin up 3.4% and Acacia Mining up 1.4%.

“The FTSE 100 fell 0.3% to 7,394, the Dax index in Germany traded 0.1 lower and Hong Kong’s Hang Seng index fell 1.2%."

Carpetright

“It’s a tale of two halves for retailer Carpetright. The first half of its financial year ending 27 April 2019 was awful with a 12.7% reduction in UK like-for-like revenue and a significant increase in pre-tax losses on a group basis.

“The second half period was much better with UK like-for-like sales decline cut to 5.4% - and even better in the final quarter with the like-for-like sales decline trimmed to 2.3%.

“With the business having seemingly found its feet, thanks to right-sizing the store estate, management now have to focus on reviving sales growth. And thankfully they are off to a good start with UK like-for-like sales up 8.5% in the first eight weeks of its new financial year, albeit the comparative period was fairly easy to beat.

“Before anyone gets carried away, it is important to remember that some of Carpetright’s problems are out of its hands. It has no control over the state of the property market and the pace of housing transactions.

“Moving house is a major catalyst for ordering new carpets, flooring or beds and if fewer people are moving one would expect demand for Carpetright’s services to ease back.

“A recent survey by property portal Zoopla found that the gap between asking and selling prices in the UK had widened amid a weaker outlook for the property market.

“Carpetright’s website goes to show it is having to pull out all the tricks to keep sales ticking over. It is jam packed with promotions such as double discounts and interest free credit deals.

“Such marketing may help to keep the tills ringing but it creates a culture of discounting that customers will expect to be permanent. It is very difficult to wean customers off discounts if they’ve become accustomed to hefty deals for a long time. Carpetright would face the risk that customers go elsewhere if they are presented with higher prices, suggesting its margins may not improve any time soon.”

Gear4Music

“Investors were prepared for online music retailer Gear4Music to sound a bum note ahead of today’s results thanks to a big warning earlier this year.

“However, the numbers still appear out of tune with what the market was expecting given today’s negative share price reaction.

“The pressure on gross margins, references to a highly competitive market and a warning over weak consumer confidence make for an uncomfortable soundtrack.

“Gear4Music has grown rapidly, perhaps a little too fast. Arguably this raised expectations to unsustainable levels and some of the company’s recent issues relate to bumping up against capacity constraints.

“Selling musical instruments and equipment over the internet seems a perfectly reasonable proposition but arguably the only barrier to entry is the strength of the company’s brand.

“To protect this, the business needs to avoid any further episodes like the one which hit it at Christmas when a surge in demand left its York distribution centre unable to cope.

“These struggles are a reminder that online retailers do not operate free of costs and actually have significant expenses around infrastructure, delivery and returns.

“Management say they are now ready for vital second half trading in the current financial year (encompassing the festive period) and they will have to be if the company is to get back on song.”

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