The Investment Column: Concerns pile up at Allied

There are few retailers which demonstrate the current volatility of consumer spending better than Allied Carpets. The company saw a freeze in sales just before and after the general election in May as wary punters adopted a "wait and see" policy towards the new government. Then sales took off in the summer, boosted by building society windfalls. Yesterday, the company revealed yet another up and down period with like-for-like sales in the half year down by 4 per cent on last year but up by 11 per cent since the winter sales started. The message is that customers are becoming increasingly savvy about carpet purchases and waiting for the sale periods before buying.

All this has made it tough for Allied Carpets, which is in danger of getting caught with either too much stock or too little as demand waxes and wanes. The City doesn't like this kind of "yo-yo" performance and has marked the shares down accordingly. Priced at 215p when Allied came to the market in summer 1996, they romped ahead to 320p before falling to a low of 167p just before Christmas

But there are encouraging signs, which helped the shares put on 4p to 175.5p. Operating profits rose 8 per cent to pounds 9.4m in the six-months to December. Sales in current trading are up strongly against strong comparisons even though management has moved towards a policy of focusing on profits rather than sales increases. The gross margin improved by almost 5 percentage points on last year, helped by better buying power caused by the strength of sterling and a move away from interest-free credit and towards cash discounts instead.

On the negative side, costs are rising with rents up by 9 per cent in the year. Leases signed in the depths of the recession are now seeing particularly onerous rent reviews. The other worry is that Allied Carpets has performed only modestly in a period of boom-like conditions - how will it fare during an expected slowdown with interest rates biting and higher taxes?

Much of this is reflected in the rating. On Panmure Gordon's forecast of pounds 20m, the shares trade on a forward p/e of 11 falling to 10. That is a substantial discount to the market. However, given the concerns, that is likely to remain the case. The shares are a solid hold with the slightly more expensive Carpetright offering better value.

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