In it together

The sub-text of United Carpet‘s profit warning on Friday may be horrifying. In fact the text of it is pretty bad!

The company operates through franchisees, some of which are financially distressed as people aren’t buying carpets. I’ve been following United Carpets for years because it looks desperately cheap, it’s stayed profitable throughout the credit crunch and its aftermath, and it has minimal debt.

But a ‘significant proportion’ of franchisees are distressed, despite the support of the mothership, which takes troubled stores back in-house hoping to return them to health and re-franchise them, so United Carpets is closing franchises, which will affect its performance. More closures are likely, to prevent:

…an accumulation of poorly performing stores creating an unsustainable financial burden on the Group.

So it’s slightly reassuring, but mostly worrying, that the board feels it necessary to state it:

…anticipates that, with appropriately adjusted central costs, the continuing core of locations will be able to operate successfully on an ongoing basis.

I’m not very familiar with franchising, but there is a franchise, Printing.com, in the Thrifty 30 portfolio, so I’d like to be.

In December’s half-year results, United Carpets reported only one store closure in the previous twelve months but that some were stores were struggling and would fail, maybe affecting the group’s performance. It remained confident, though, that the franchise structure was a source of strength.

It doesn’t look that way to me.

Recent events show a franchise’s strength is dependent on the financial health of its franchisees, yet that may not be apparent from the results of the franchise, which can look financially strong right up until the point its franchisees can’t pay the bills, including money owed to the mothership itself.

I suppose you could say any company is dependent on its customers, but franchisees are clones of each other, so if one is in trouble it’s highly likely others are.