Trying to find a retail stock with good growth prospects and a reasonable valuation isn’t easy. The supermarkets still look risky, while online plays like ASOS seem very expensive.
All three companies reported strong sales growth and said they expect full-year results to be in-line with expectations, but they’re far from equal as potential investments, as I’ll explain.
Pets At Home
Shares in Pets At Home have fallen by 11% since the firm’s IPO in March 2014.
However, today’s news that like-for-like revenue rose by 4.1% during the third quarter helped lift the shares by 3.5% this morning.
Although no profit figures were given today, Pets’ reported a gross margin of 53.8% for the first half of last year, along with an operating margin of 12% — both impressive figures.
Pets currently trades on a full-year forecast P/E of 15.5, falling to 13.9 for 2015/16. That doesn’t look unreasonable, to me.
Halfords recently received a blow when its highly-rated chief executive, Matt Davies, announced he was leaving to run Tesco’s UK operations.
Mr Davies, who previously ran Pets At Home, has made good progress at Halfords, and looks likely to leave the retailer on a high — the firm said today that like-for-like sales rose by 6.6% during the 41 weeks to 9 January 2015.
Halfords enjoys an operating margin of 8.3% and trades on a full-year forecast P/E 14.3. Coupled with a prospective yield of 3.5%, I think that’s reasonably good value.
Today’s update from Poundland doesn’t seem to have lived up to investors’ expectations, and the firm’s share price is down by nearly 5% as I write — so what went wrong?
Total revenue rose by 10% during the third quarter, but unlike its peers, Poundland did not break this down into total sales and like-for-like sales. This deliberately vague reporting suggests to me that like-for-like sales may have been unimpressive, and most of the increase may have come from new stores.
Poundland currently trades on a current year forecast P/E of 26, despite having a measly 2.5% operating margin. That’s just too expensive, in my view.
Today’s best buy?
In my view, Halfords and Pets at Home are both reasonable buys in today’s market. Although neither is an outright bargain, both appear to be well-run businesses with a large share of a profitable niche. This should be good for long-term profit margins.