Rough ride continues for Feltex as competition hits margins

More bad news flowed from Feltex Carpets yesterday as the manufacturer said its second half-year was shaping up to be worse than expected.

Just two weeks after posting an $11.8 million half-year loss, the company said tough competition from key rivals across the Tasman had squeezed profit margins for January and February.

"While January's sales performance was in line with our expectations, the margin performance was below expected levels, reflecting these extremely competitive market conditions," the company said.

"Market feedback has indicated the retail environment in February was also challenging, and this has been reflected in our trading for February, with sales and margins lower than expected."

With trading conditions expected to remain uncertain in Australasia, chief executive Peter Thomas said Feltex was unable to give guidance on performance for the rest of the year to June.

However, he did not consider yesterday's announcement a profit downgrade.

"I don't classify it as a profit downgrade but as advice to the market of the trading conditions we are continuing to face," said Thomas.

"We want an open dialogue with our shareholders as to how the year is emerging, hence we saw it appropriate to put out a statement that covered a couple of issues."

He said the third financial quarter - January to March - was always the industry's toughest.

Feltex shares dropped 4c yesterday to 44c, just 5c above a year low of 39c. The stock had plummeted 70 per cent in the last year.

Strong comparisons can be drawn with events this time last year when Feltex's troubles started to snowball.

On April 1, less than two months after releasing its half-year result and claims it was on track to meet its prospectus profit forecast of $23.9 million, the company slashed its net profit forecast to $15 million-$16 million.

That figure was lowered further to $11.5 million-$12 million in June with the problems blamed on a tougher sales environment here and across the Tasman - where it earns 75 per cent of its revenue.

By mid-year, the company had cancelled its final dividend and launched a full review of its operations in an effort to claw back profits.

That saw former chief executive Sam Magill and 46 senior executives replaced by a new management team, closure of the Braybrook yarn plant in Melbourne at a cost of 302 jobs, and consolidation of woollen yarn manufacturing in New Zealand.

Those restructuring costs dragged Feltex to a first-half loss of $11.8 million last month, but Thomas then said improvements from the restructuring were starting to flow through. However, he said the competitive retail environment was making things tough and he expected it to get tougher.

"But we are in a far better position to address it than we were six months to 12 months ago," he said.

Feltex has also reached a settlement with Magill, who left in August and whose severance payout has since been the basis of a legal dispute. Feltex is in the final stages of selling surplus property in Melbourne and will use the sale proceeds to reduce debt.