There was nothing wrong with the profits, up a very respectable 24 per cent to pounds 9m, but there were questions about the strategy. The key issue is that Allied has cut its advertising spending by 25 per cent to concentrate more on instore promotions.
Management maintains that the Allied name is so strong that carpet shoppers are likely to drop by anyway, even if only to make comparisons. It is therefore cutting prices in stores to drive sales rather than worrying too much about enticing shoppers in.
So, while gross profit margins have fallen by 2 percentage points, expenses have dropped by the same amount leaving the operating profit margin unchanged. With like-for-like sales up 13 per cent the strategy seems to be working and Allied claims its advertising spend is still the highest in the sector. But it is risky. There is a danger that shopper numbers will fall and Allied could find margins under pressure as it battles against the independent retailers, which are being aggressive on prices.
In addition to the 212 Allied stores, the company is expanding its lower price Carpetland format. This will compete head on with Lord Harris's Carpetright though Allied does not see this as a problem. With a 14 per cent share of the UK carpet market, Allied claims it will have around 25 per cent by 2000. The share is supposed to come from the independents, which still account for more than half the market.
The shares shed a further 6.5p to 296.5p yesterday and on NatWest Securities full-year forecast of pounds 18m Allied shares trade on a chunky forward rating of 22. This is higher than the highly regarded Carpetright and is starting to look expensive.Reuse content