Shares in discount retailer Poundland have fallen more than 21% in early trading after it revealed challenging first-half figures.
Underlying pre-tax profits for the six months to the end of September came in at £9.3m, 26% lower than the same period last year as the retailer was hampered by higher store opening costs and adverse currency movements.
Like-for-like sales were down 2.8% as it noted the industry was “more competitive than ever”.
The retailer also warned that the national living wage – which means workers over 25 must be paid at least £7.20 an hour from next April, rising to £9 by 2020 – would cost an additional £4.3 million in the 2017 financial year.
The firm said this would not result in higher prices for customers and it was instead planning cost-cutting measures such as self-scanning checkouts and shelf-ready packaging.
In September, Poundland’s £55m takeover of rival 99p Stores was given formal clearance from competition authorities.
Poundland chief executive Jim McCarthy said the merger would provide a huge lift for the retailer as the financial year progressed.
“The 99p Stores acquisition is a transformational deal for us, adding the equivalent of five years of UK organic growth and 40% to our store numbers in one go,” he said.
“The early sales uplifts from the first converted stores are very encouraging and we now plan to accelerate the conversion programmes so that the vast majority of 99p Stores will be converted by the end of April 2016.
“We are now increasing our UK and Ireland store target from 1,070 to 1,400 stores.”
Hargreaves Lansdown equity analyst Keith Bowman said it had been a difficult six months for Poundland.
“Profits have fallen short of expectations, whilst trading performance at the acquired 99p Stores – hindered by the uncertainty of a competition review – has disappointed.
“Like-for-like sales have battled tough comparatives, foreign exchange movements are providing a headwind, while accompanying management outlook comments offer little near-term reassurance.
“On the upside, store numbers are growing, with management’s store growth target being expanded, conversion of the 99p Stores to the Poundland format is being accelerated given the improvement in sales generated, while expected cost savings due to its newly increased scale are being flagged.
“In all, despite expected long-term growth, investor confidence near term is being further tested.”