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Topps Tiles profits warning - do not be tempted to bottom fish

By Tom Winnifrith | Wednesday 4 October 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

On the surface of it, the retailer Topps Tiles (TPT) looks cheap. Even after today's trading statement the shares, at 73p offer trade on a PE of just 10 for the year ended 30 September 2017. But do not bottom fish. Here's why.

The statement today notes:

Revenues for the 52 week period are expected to be in the region of £211.6 million (2016: £215.0 million). Like-for-like revenues in the 52 weeks decreased 2.9% on the prior year (2016: +4.2%). Like-for-like revenues in the 13 weeks ended 30 September 2017 decreased by 3.0%.

Whilst we have seen a moderate improvement in trading in our final quarter, market conditions remain challenging and the Group expects adjusted pre-tax profits for the 52 week period ended 30 September 2017 will be at the lower end of the current range of market expectations.


The range of forecasts was £18.5 million to £19.5 million at a normalised pre-tax level ( It was £10.1 million in H1) and EPS of 7.3p-7.9p ( 4.11p in H1).

So the second half was weaker than the first. Underlying sales are still falling despite the company launching a range of new initiatives to tackle them and one imagines that general wage inflation muust be adding to a squeeze on margins. Is that going to change in the current year?

No. As I explained in yesterday's bonus bearcast UK consumer savings are way below anything that we have seen in my lifetime while consumer debts are at record highs. Interest rates are going to rise and that has got to put a further squeeze on discretionary consumer spending. That and a slowing housing market have got to put further pressure on Topps' sales and also margins as folks who do want tiles opt for cheaper, lower margin, lines.

Meanwhile, in H1 Topps paid £500,000 of interest on its £26.6 million of borrowings. As interest rates go up so too will the cost of servicing that debt and that will be another squeeze on profits. At this stage it really is hard to forecast current year profits so poor is earnings visibility given the dark macro clouds and that means there is no rush to buy the shares.

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