Floored! Topps Tiles profit hits the deck

Not for the first time, the tile giant has run into trouble. Can the share price recover again?

Investors betting on a post-election spending boost for Topps Tiles (LSE:TPT) have been left frustrated after the home improvement chain slashed profits guidance for this year.

The Leicester-based group lost a quarter of its value following today's unscheduled trading update, with shares below 60p for the first time since July 2018. The slump unwinds the recent progress seen over recent weeks, following signs of an improvement in housing market confidence in the wake of December's General Election.

Topps pointed out today that such indicators traditionally have a lagged impact on its trading, and that any benefit was unlikely until the second half of its October financial year.

In the meantime, retail like-for-like sales are down by 5.5% in the eight weeks to 22 February. This follows on from a drop of 5.4% in the first quarter, when trading was significantly impacted by political and economic uncertainty in the run-up to the election.

As most of its half year is now complete, Topps believes that profits will be significantly down on the £8 million adjusted profit recorded last May. Profits for the full year will also be “materially below” current City forecasts of between £13.5 million and £14.5 million.

The update spooked other consumer-related stocks in a session already impacted by fears over the coronavirus outbreak. B&Q owner Kingfisher (LSE:KGF) was down 4% to 187.75p, while paving specialist Marshalls (LSE:MSLH) dropped 3% to 753p.

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

For Topps investors, the performance extends a recent frustrating pattern as previously hard-won share price gains are wiped out in a flash. Fickle trends in consumer confidence are usually to blame, although Topps deserves credit for attempting to reduce this exposure through the roll-out of a new commercial division.

The operation has doubled the company's addressable market to more than £700 million, with the aim of being a market-leader in five years. House broker Peel Hunt said in November that commercial represented a “material” medium-term profit opportunity and one that had yet to catch the eye of investors.

Having built up through the acquisitions of Parkside Ceramics and Strata, commercial tiling achieved better-than-expected revenues of about £5 million in the most recent financial year.

That's still a fraction of the £214 million generated by the core retail business, although with a dividend yield of more than 4% investors are at least being paid to wait for commercial to gain speed. Topps remains cash generative despite the recent sales pressure.

A look at the share price chart also reveals that previous visits to the 60p level have been followed by a decent bounce. Analysts at Liberum remain wary this time, however, after cutting their price target to 65p from 85p in the wake of today's update. 

Topps has about a third of the UK domestic tile market, trading from 361 retail stores and a recently relaunched website.