Poundland takes pounding after warning of volatile trading

Poundland is pressing ahead with the rebranding of 99p Stores, after a poor half-year result and a warning of "highly volatile" conditions in the third quarter.

The single-price retailer’s underlying results for the period ended 27 September were largely disappointing, with like-for-like sales down 2.8% and EBITDA down 18.5% to £16.5m. Pre-tax profits were down a sizeable 26.3% to £9.3m.

The FTSE 250 company reported an improved balance sheet, however, with net funds of £66.1m up from net debt of £4.4m in 2014 and upped the interim dividend by 10% to 1.65p per share.

Management are confident that the acquisition of competitor 99p Stores was would add an incremental EBITDA of £25m.

Chief executive Jim McCarthy remained optimistic about the expanded group’s outlook, given the acquisition and continued expansion into Europe.

“The 99p Stores acquisition is a transformational deal for us, adding the equivalent of five years of UK organic growth and 40% to our store numbers in one go,” he said.

“The early sales uplifts from the first converted stores are very encouraging and we now plan to accelerate the conversion programmes so that the vast majority of 99p Stores will be converted by the end of April 2016.”

But he admitted that "highly volatile trading conditions" had been experienced so far in the third quarter. "The quarter's performance therefore depends more than ever upon the last six weeks' trading towards Christmas."

Poundland’s UK and Ireland estate grew by 52 stores in the period, with 30 opening in September to bring the total to 640. The group lifted its target total estate from 1,040 stores in the region to 1,400 stores. Its ‘Dealz’ concept in Spain also opened its tenth trial store.

The company said that the government's proposed national living wage will, without mitigation, result in an extra £4.3m hit in the 2017 financial year.

Poundland plans to mitigating the cost by accelerating investment in the current year in productivity, with an extra £2m this year.

Analyst Keith Bowman at Hargreaves Lansdown said profits fell short of expectations and noted that trading performance at 99p Stores had been hindered by the uncertainty of a competition review.

"On the upside, store numbers are growing, with management’s store growth target being expanded, conversion of the 99p Stores to the Poundland format is being accelerated given the improvement in sales generated, while expected cost savings due to its newly increased scale are being flagged."

Kate Calvert at Investec felt the results were in line with lowered expectations.

"The disappointment lies within current trading which is clearly weaker than expected as Poundland heads into peak. The 99p Stores acquisition should yield material synergies, but less than we expected and the condition of the business is worse.

"The shares do not appear to be expensive, especially when building synergies into account. However question marks over the sustainability of a fixed price model and the underlying Poundland estate are likely to remain."

Shares in the company took a pounding, falling 20% to 222.2p by 0922 GMT on Thursday.