Sellers of big-ticket items are coming under pressure, as demonstrated by profit warnings from the likes of Carpetright (CPR) and Safestyle UK (SFE:AIM) as well as DFS Furniture (DFS).

It may seem counterintuitive but Shares sees strong recovery potential at sofas-to-carpets seller ScS (SCS).

Investors need to go into this trade with eyes wide open. The upholstered furniture-to-floorings seller plunged into administration in 2008, among the casualties of the financial crisis. Yet it relisted on the stock market in 2015 and has since demonstrated a more robust business model while gaining market share.

GREATER RESILIENCE

Under the leadership of CEO David Knight, management has made progress in improving the resilience of the business. This has been achieved in three ways: Strengthening its value-focused customer proposition; broadening the customer base to include more affluent shoppers via House of Fraser concessions as well as the addition of more premium brands; and increasing overall cost efficiency.

The self-styled ‘Sofa Carpet Specialist’ offers third party brands such as La-Z-Boy, G Plan and upmarket name Parker Knoll, as well as own brands SiSi Italia and Endurance, while offering four years’ interest-free credit on already ultra-competitive prices.

LOW STOCK RISK

ScS is cash generative, has a strong balance sheet and a website that complements its large out-of-town retail outlets. And as broker Shore Capital explains, roughly 95% of ScS’ stock is purchased on the back of a customer order, meaning the retailer bears very little stock risk, as the only inventory carried is display stock or returns.

Shore upgraded sales, profit and earnings per share estimates for the year to July 2018 and beyond following ScS’ trading update (31 Jan)
for the six months to 27 January 2018. This revealed better-than-expected 2.2% like-for-like order intake growth.

Knight insisted his charge performed in line with expectations over the key winter sales period and believes ScS’ ‘increasing resilience and value proposition will enable us to manage the continued economic uncertainty and take advantage of opportunities’.

For the year to July 2018, Shore forecasts adjusted pre-tax profit of £12.5m (2017: £12m) for earnings per share of 24p and a 15p dividend.

These estimates place ScS on a cheap-looking prospective price-to-earnings multiple of 8.8 times with an attractive 7.1% yield. For financial year 2019, the broker forecasts increased pre-tax profit of £12.7m, earnings per share of 24.5p and a 15.3p dividend.

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