Poundland s sales slide slams its shares

Updated 1333 BST

Poundland has become one of the first major UK discount stores to issue what amounts to a profit warning, after stating it expected market forecasts of 2015/16 pre-tax profit to fall to £47m-£48m.

With consensus running as high as £49m earlier this month, according to Thomson Reuters data, the shaved guidance combined with news that recent revenue growth at the largest so-called ‘single-price’ discount retailer in Europe might be a meagre 4%, sent its stock as much as 5% lower on Thursday morning.

It’s notable that Poundland resorts to stating it expects that the second half of its financial year to show improvement, even though the H2 of the year before offered a much ‘easier’ comparable performance basis than the first half.

 Sales slowly sagging

The firm, which listed on the stock market in March 2014, said underlying profit rose 19% to £43.7m for the year that ended on 29th March, in line with City forecasts.

Sales were 12% higher at £1.12bn.

However, Poundland’s latest available figures, for the 11 weeks to 14th June, showed sales, calculated using artificially constant foreign exchange rates, grew just 4.1%.

That compared with 7.1% growth in the fourth quarter, and 10.2% in the third.

I’d argue, as I have in the past, that Poundland’s sector positioning continues to lack a sustainable competitive advantage, and this is what its declining sales growth rate is reflecting.

I’m fairly sure that I’m not alone in finding some irony in this retailer reflecting several of the same characteristics as its beleaguered giant UK rivals like Tesco, Sainsbury’s and Morrisons, right down to the profit warnings.

But these are well in keeping with my long-standing view that there is little convincing evidence that PLND’s precise retail market positioning is coherent and sustainable.

Margin squeeze

PLND is sandwiched between the so-called hard discounters on the one hand, and established supermarkets on the other all seeking to expand general retail and grocery market share by means of razor thin margins.

The former are capable of throwing deep resources at the threat engendered by the consumer shift, at least partly, to low-cost grocery shopping. The latter’s entire business model is built and honed on tight margins.

PLND needs to pull away from the UK pack on net margin, but it currently only manages a 1.3% advantage versus the average, whilst I estimate Lidl and Aldi have achieved at least 1.8% below this average.

Sainsbury’s last full-year net profit margin was just 30 basis points wider than Poundland’s.

At the same time Aldi and Lidl have worked hard to foster broader appeal amongst consumers, eventually attaining a place in the shopping habits of a broad range of social brackets.

PLND has not managed to achieve this.

The group could achieve the significant enhancement of scale that could be a game-changer considering its business model, from a sealed deal with 99p Stores, but the Competition and Markets Authority is not scheduled to rule on the takeover until October.

Overall, all the above kinks are contributing to Poundland’s consistent strain of underperforming revenues and profits, and in turn the failure of the stock to sustainably exceed ephemeral IPO highs above 401p.

In the nearer-term, there does not seem to be a great deal of impetus for the stock to clear confirmed resistance between 309p-311p.

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Trading in Poundland by City Index clients shows themes which need little elaboration, judging by the daily chart of Poundland DFT below.

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In the very short-term trading intervals of 30 minutes, the main action clearly occurred earlier in Thursday’s session.

A not very helpful suggestion to exit a short position was issued within Wednesday’s 3:30 pm interval, but it was too early, a fair reminder not to rely too much on any single trading tool.

300p remains an obvious pivot over the short term too.

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