Shares in replacement windows and doors specialist Safestyle(LSE: SFE) have fallen as much as 20% today after the company released a profit warning. This follows a difficult period for the firm that has now sent its valuation 33% lower in the last year. Here's why it could be worth selling in favour of a potential turnaround play.
Difficult trading conditions
The update Wednesday showed that there has been a further deterioration in trading conditions. This is largely due to declining consumer confidence, which has contributed to a fall in the value of the company's sales of 0.3% in the three months to 30 November. This means that in the 11 months to 30 November, the company's sales by value are 0.8% lower than for the same period in 2016.
As well as weak sales, the company has seen increased costs in acquiring new customers. This means that its profitability for the current year is expected to be lower than current market expectations. It also expects market conditions to be tough in 2018, and in response it has lowered its expectations for performance next year. Although it is seeking to reduce costs and become more efficient, the outlook for the business appears to be downbeat.
Of course, Safestyle's performance is unsurprising. Higher inflation means that consumers simply have lower disposable incomes in real terms. This means that the purchase of non-essential items such as new windows and doors is being postponed until a later date. With the outlook for the UK economy being uncertain and inflation expected to remain ahead of wage growth in the near term, the situation for the company could get worse before it gets better. As such, now may be the right time to sell it.
However, not all consumer stocks may be worth avoiding at the present time. Sports Direct(LSE: SPD) is a company which could benefit from a squeeze on consumer confidence. It focuses on offering value for money and was a strong performer in the financial crisis. This means that it could see demand for its budget proposition increase, which may help it to deliver a successful turnaround after a difficult period.
Looking ahead, Sports Direct is expected to deliver a rise in its bottom line of 42% in the current year. It is due to follow this up with additional growth of 13% next year. Despite this strong rate of growth, the company trades on a price-to-earnings growth (PEG) ratio of just 1.7. This suggests that it could offer a wide margin of safety as well as strong share price growth.
Certainly, the company has been the centre of criticism from various politicians and the media in the last couple of years. However, it seems to have a good underlying business model which may be well-suited to the challenging outlook for the UK economy.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Safestyle UK and Sports Direct International. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.