Trade Expansion And Digital Adoption Will Drive Long Term Earnings Resilience

Catalysts

About Topps Tiles

Topps Tiles is a leading U.K. specialist in tiles and hard surface coverings, serving both homeowners and trade customers across retail, online and B2B channels.

What are the underlying business or industry changes driving this perspective?

• Execution of Mission 365, with the group already 40% of the way to its GBP 365 million sales ambition and targeting 8% to 10% net margins, provides a visible growth runway that is expected to support revenue and earnings as scale benefits and buying efficiencies continue to flow through.
• Rising penetration of trade customers, now around three quarters of group sales and 69% of Topps Tiles revenue, deepens recurring, project-based demand that is less cyclical than pure DIY, supporting more resilient top line performance and improving operating leverage on fixed costs.
• Accelerating digital adoption across the portfolio, with group digital sales now above 21% and rapid growth in Pro Tiler, Tile Warehouse and upcoming trade app capability, is expected to increase customer reach, conversion and average transaction values, enhancing revenue density and gross margin.
• Expansion from tiles into the broader GBP 2.1 billion hard surface and essentials market, including outdoor products, luxury vinyl tiles and installation accessories, increases share of wallet per project and supports mix improvement, which can lead to higher gross profit per customer and stronger net margins.
• Scaling of B2B and contract-based channels via CTD, Parkside and national housebuilder relationships, alongside the premium Fired Earth brand, builds a more diversified customer base with longer-term contracts and higher-value specifications. This can help smooth revenue volatility and support margin expansion as the acquired operations move from loss making into profit.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Topps Tiles's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.0% today to 4.4% in 3 years time.
• Analysts expect earnings to reach £15.2 million (and earnings per share of £0.08) by about December 2028, up from £6.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting £18.1 million in earnings, and the most bearish expecting £13.5 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 9.8x on those 2028 earnings, down from 14.7x today. This future PE is lower than the current PE for the GB Specialty Retail industry at 15.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.45%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Execution risk around CTD and Tile Warehouse, both of which are currently loss making or only expected to reach breakeven in FY 2026, could lead to prolonged underperformance if integration benefits, like-for-like growth and cost savings fail to materialise as planned. This could weigh on group earnings and net margins over the medium term.
• Structural shifts in home improvement and hard surface trends, such as faster adoption of alternative coverings and panel solutions by consumers and housebuilders, may erode the long term growth of traditional tiles faster than Topps Tiles can pivot its range and marketing. This could suppress revenue growth and limit mix driven gross margin improvement.
• Ongoing cost inflation in wages, rents, utilities and regulatory compliance, alongside a potentially weaker U.K. consumer backdrop, may make it harder to pass higher costs through pricing or volume. This could put pressure on operating costs, compress net margins and constrain profit growth despite rising sales.
• Dependence on rapid digital expansion, including trade apps, new ERP and data platforms, introduces technology, adoption and execution risk. Delays, higher than expected implementation costs or lower user uptake could dilute the expected efficiency and revenue benefits, limiting improvements in gross margin leverage and earnings growth.
• Reliance on trade and B2B demand, such as large contractors and national housebuilders, exposes the group to cyclical downturns in construction activity and tighter credit conditions. This could lead to reduced project volumes, increased bad debts from trade credit and softer like for like sales, directly impacting revenue and adjusted pretax profit.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of £0.53 for Topps Tiles based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £0.7, and the most bearish reporting a price target of just £0.4.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be £347.7 million, earnings will come to £15.2 million, and it would be trading on a PE ratio of 9.8x, assuming you use a discount rate of 12.4%.
  
• Given the current share price of £0.45, the analyst price target of £0.53 is 15.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.