Third quarter results force Exane to cut Poundland to neutral

The discount retailer, including the newly acquired 99p Stores, said on Thursday it experienced strong sales growth across its operations for the 13 weeks ended 27 December 2015, with total sales for the quarter growing 29.4%.

"However, the trading conditions that we experienced in November continued through the third quarter, with high street customer numbers down year-on-year and this has impacted sales growth," said Poundland chief executive Jim McCarthy.

He indicated the retailer was still expecting pre-tax profit for the full year to be towards the lower end of market expectations, between £39.8m and £45.8m.

Exane BNP Paribas noted that high street traffic trends look structurally pressured which is a big challenge for fixed price retailers.

“With shifts on-line most marked over festive trading – a quarter in which Poundland makes c50% of its EBITDA – profit visibility is low and we fear Poundland faces structural headwinds,” the broker note said.

While the acquisition of 99p Stores has boosted the retailers profits, the investment bank suggested the retailer actually needs fewer stores.

“It is shifting to retail parks and is the dominant fixed price UK retailer, but opening lots of stores to ‘turn’ the P/L isn’t the answer.”

Exane BNP Paribas said the burden is on management to prove its model is sustainable.