With the high street having been battered of late, there must surely be some downtrodden bargains to be had. A trawl through the retail sector turns up a couple of possibilities.
When a recession bites, most businesses feel the strain. But those with high capital requirements and high overhead costs are generally less flexible in weathering the downturn, and that surely includes a lot of our retail giants -- with the running costs of stores being pretty much fixed, it's very difficult to scale down the costs of running a business without closing stores and laying off staff.
With that in mind, I thought I'd take a look at the retail sector today, and see if there are any that look to be handling the recession well and which might present tempting investment opportunities.
Silver discs
One group of retailers that I expected to be doing badly are the purveyors of shiny silver discs, or record shops as they used to be known. The Virgin Megastores were famously sold off to Zavvi after failing to stay profitable, with Zavvi in turn hitting the skids in the wake of the Woolworths collapse. Couple that with the growth of the MP3 world and online music sales, and you might be forgiven for thinking the days of HMV Group (LSE: HMV) might be numbered. And the last time I visited an HMV store, it wasn't exactly buzzing with excitement.
But, to my surprise, the numbers make HMV look far from dead. In contrast to music CDs, sales of DVDs and the new-fangled Blu-Ray things haven't been overtaken by downloads yet, and probably won't be for some time. HMV also owns the Waterstone's bookshop chain, which seems to be doing well. And rather than cutting back on its record shops, HMV has actually bought up some of the old Zavvi stores.
Unlike some other battered high street retailers, HMV has remained in profit, with expected earnings per share for 2009 of 11p putting the shares on a P/E of 11.5. And with 2010's earnings expected to come in at 12.5p per share, that makes for a prospective P/E for next year of under 10, which is a good bit lower than most of the retail sector.
HMV has also been good at generating cash to back up its earnings, and has maintained steady dividend payments. With the dividend expected to remain unchanged at 7.4p per share, its current yield of 6% looks very attractive. Unlike many retailers whose share price has bounced back strongly of late, HMV's is still wavering. But even if it should fluctuate a bit over the next couple of years, which it may well do in these recessionary times, a 6% dividend while waiting for the inevitable economic recovery is not to be sniffed at.
Books and all
An interesting comparison to HMV, I think, is WH Smith (LSE: SMWH), with the two companies' markets overlapping to a degree.
After fluctuating fortunes over the past couple of years, with a poor year in 2008 following on from a better 2007, WH Smith is expected to turn in some decent profits this year and next, on similar turnover to HMV, with approx 40p per share pencilled in for 2009 and 2010.
With the share price standing at 445p at the time of writing, those forecast earnings suggest a P/E of approx 11 for both years. But that share price has already recovered over the past few months, from its year low of 313p. Consequently, on the current price, the expected dividend yield for this year is only around 3.5%, which is almost miserly when compared to HMV's. And in 2010, if expectations are met, that will only rise to 3.9%.
So, we have two companies on similar P/E ratings, in arguably similar markets. Which one looks the better value?
Buy one, hold one
Considering HMV's steadier past performance, its superior earnings growth expectations for 2010, and its much better dividend yield (with decent prospects for maintaining it), I'm going to overturn my instinctive feelings about record shops and suggest HMV might make for a decent investment right now.
The analysts' consensus for both companies is a pretty solid but underwhelming 'Hold', and while I might agree with that assessment for WH Smith (which looks a safe and fairly-priced share to me), I think HMV deserves better than that. Of course, I might be badly wrong, but I think HMV is definitely the more tempting of the two at the moment, and it looks like a good prospect for riding out the economic storms.
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