Do Topps Tiles shares begin their recovery here?

After a challenging quarter blamed on Brexit uncertainty, the shares have hit a key support level.  

It's been too easy for investors to give Topps Tiles (LSE:TPT) a wide berth after another lumpy year in which sales have been exposed to the fickle trends in customer confidence.

But there's much more to Topps than meets the eye, something the company's joint house broker believes investors have been slow to pick up on. Peel Hunt's optimism stems from the launch of a commercial division, which has doubled Topps' addressable market to more than £700 million.

The company's ambition is to achieve a market-leading position within five years as Topps goes about building a new and significant profit stream over the medium term.

The new commercial tiling business, which started a couple of years ago with the acquisition of Parkside Ceramics before April's addition of Strata, achieved revenues of about £5 million in the financial year just ended. The figure was higher than Peel Hunt expected, with revenues forecast to grow to between £12 million and £14 million in the coming year.

It's still a slither of the £214 million in annual revenues generated by the core retail business. To illustrate the uncertain trading conditions facing this division, like-for-like sales fell 1.9% in today's final quarter after rising 3.8% in the previous three months against softer comparatives.

Topps shares have mirrored this fluctuating performance, with the stock down over 11% to 64p first thing this morning, despite the company saying that profits in the year to September 28 will be in line with the City's consensus of around £15.8 million.

Over the past few years, previous visits to the 60p level have been followed by a decent bounce.

Source: TradingView Past performance is not a guide to future performance

The stock trades with a forward price/earnings (PE) multiple of 10x and a dividend yield of 5%, so investors are currently being paid to wait while the commercial division gains speed.

Peel Hunt, which has a target price of 100p, said:

"We continue to view the new commercial division as a material medium-term profit opportunity, which has yet to catch the eye of investors."

This oversight might be because commercial revenues are still to be broken out separately in trading updates, as the company focuses on investing for future growth. Its spending includes growing the salesforce, opening new design studios and improving digital capabilities.

Chief executive Matt Williams said Parkside had established significant momentum in its second year of ownership, while the performance of the retail stores compared favourably with the overall tile market. 

However, Williams added: "Political uncertainty continued to weigh on consumer confidence in the final quarter and we expect this to remain a feature until there is greater clarity." His comments echo those made in recent days by other "big-ticket" retailers, such as ScS (LSE:SCS) and DFS (LSE:DFS).

This uncertainty prompted joint broker Liberum to cut its profit forecasts for 2020 and 2021 by 6%, despite the resilient performance revealed in today's fourth quarter update.

They said:

"In this tough market, we think the group's strategy remains sensible and it has made further progress".

Topps has about a third of the UK domestic tile market, with the company ending the financial year trading from 362 outlets. The company was recently ranked third for customer satisfaction across the retail sector, while its new website launched yesterday. About 70% of customers who transact online still use stores for collections and returns.