The UK retail sector faces an uncertain future. Inflation has risen significantly in the last year and is now higher than the rate of wage growth. This means that consumer spending levels could decline, since consumers have less disposable income in real terms. Spending habits could change, and shoppers may become more price conscious as their pay packets become increasingly stretched.
Against this backdrop though, Morrisons (LSE: MRW) seems to have significant investment potential. Here’s why it could be worth buying ahead of one sector peer in particular.
Strategy
Under its current management team, Morrisons has made a range of changes to its business model. It has focused on improving its financial strength, with debt reduction being a key aim for the company. This should provide it with greater financial flexibility if there is a difficult period for the UK retail sector. Furthermore, lower debt levels may lead to improved investor confidence and a higher share price over the medium term.
In addition, the company has leveraged its status as a major food supplier by teaming up with Amazon via its online grocery service. This is a capital-light venture for Morrisons and should deliver strong sales growth without major investment. Similarly, its resurrection of the Safeway brand gives it access to the fast-growing convenience store market. This could increase sales and profitability while also commanding low initial investment.
Growth potential
Looking ahead, the company is expected to report a rise in its bottom line of 14% in the current year. This is around twice the growth rate of the wider index and shows that its strategy is performing well. Despite this upbeat outlook, the company trades on a price-to-earnings growth (PEG) ratio of just 1.4, which suggests that it offers a wide margin of safety. This could allow it to deliver strong share price growth, as well as limiting its downside risk.
Clearly, the outlook for the company is uncertain. The UK economy could experience a difficult period. However, with a sound strategy, improving financial position and strong growth potential, Morrisons seems to be an excellent buy for the long term.
High price
While Morrisons may be worth buying, fellow consumer stock Camellia (LSE: CAM) could be a stock to avoid. The diversified consumer goods company, which focuses on tea and coffee, reported a profit from continuing operations of £1.9m on Friday in the first half of its financial year. It struggled due to poorer prices for tea in India and Bangladesh, although it benefitted from higher volumes and prices for soya and citrus. Furthermore, it has been able to substantially improve its profits in Food Service, Associates and Speciality Crops.
The company is expected to deliver a pre-tax profit of £19m in the current year. While this may be a solid result given its difficult trading conditions, its forward price-to-earnings (P/E) ratio of 100 suggests that the market may have already fully priced-in its outlook.
