The market gave a mixed response to results this morning from NEXT (LSE: NXT), Home Retail (LSE: HOME) and Thorntons (LSE: THT). In early trading, clothing specialist NEXT headed the FTSE 100 leaders board, Argos and Homebase owner Home Retail led the mid-cap FTSE 250 risers, while the shares of small-cap chocolatier Thorntons slumped 13%.
Is there value for investors in these three retailers after today’s news?
Many great British retailers have struggled in recent years — just look at Tesco — but NEXT has continued to grow from strength to strength.
In this morning’s first-quarter trading update for the 13 weeks to 25 April, the company reported full-price sales growth of 3.2% and total sales up 4.1%. Management also reiterated previous sales and profit guidance for the full year: full-price sales growth of between 1.5% and 5.5%, and pre-tax profit growth of between 0.4% and 6.7%. These are decent numbers in a trading environment in which many retailers are struggling for growth.
NEXT’s four executive directors have all been with the group for 20+ years. A strong management track record is a great bonus for investors, and, in the case of NEXT, there’s another bonus in that the Board gives a clue to the price at which the shares might be a good-value buy. That’s because management sets a price, below which it believes buying back the company’s shares is the best use of surplus cash.
The current buy-back level is 6,827p, compared with a share price of 7,400p, as I write. And with a well-above market average forward price-to-earnings (P/E) ratio of 17.2 it may be worth waiting for a pull-back in the shares, as happened towards the end of last year when the spell of unseasonably warm weather hit sentiment and sent the shares below 6,500p.
Home Retail is in the middle of a five-year transformation plan for Argos and a recently-formulated productivity plan for Homebase. The group is seeking to not merely cope with the digital revolution, but to reinvent itself as a digital retail leader.
Full-year results this morning seem to show the group is well on track. Management reported a second year of like-for-like sales growth at both Argos and Homebase. A rise in pre-tax profit of 14% was ahead of analyst consensus expectations, and the Board confidently lifted the dividend for the year by 15%.
Home Retail was on a below-market-average P/E for the year ahead, and I’d now expect analysts to increase their earnings estimates. I reckon the new consensus would put the company on a P/E of less than 13, which looks an attractive rating.
Thorntons has struggled to adapt to changing shopping patterns so far. The company’s strategy is to cut back its High Street presence by closing under-performing stores. In this morning’s first-quarter trading update for the 15 weeks to 25 April, Thorntons said it had closed a further five stores during the period, leaving it with 243 stores — a long way off its longer-term objective of creating a flexible and sustainable estate of between 180 and 200 stores.
At the same time as shrinking its High Street exposure, Thornton’s is seeking to grow its commercial sales — supplying supermarkets and other third parties. However, this hasn’t been going to well, with the company issuing a profit warning in the run-up to Christmas as a result of short-term warehousing problems, but more worryingly “a significant reduction in previously indicated orders from the major grocers who also took in stock later than anticipated”.
Today’s trading update showed disappointing UK commercial orders persisting — sales in the division were down 6.1% — although the company said this was due to reduced levels of orders from one customer. However, that’s quite a hit from just one customer reducing orders, and I’m always a little wary of companies that are to some degree at the mercy of a few big customers.
Thornton’s trades on a forecast P/E of less than 10 for its financial year ending 30 June. However, analysts see another year of falling profits ahead, with earnings forecasts pushing the P/E up to 12. I think, at this stage, Thorntons deserves a sub-par P/E and that this small-cap company is one to watch from the sidelines for the time being.