With deflation being a reality, the disposable incomes of the vast majority of UK shoppers are rising in real terms for the first time since the start of the credit crunch. In other words, wage rises are now ahead of inflation (even if your wages are stagnant in nominal terms) and this means that the spending power of your pay packet is going up.
Clearly, this is likely to have a positive impact on consumer spending levels and, while deflation may yet cause problems in the long run (such as reduced confidence and delayed investment) in the short to medium term it is likely to provide a boost to the top lines of retailers and also to investor sentiment in their shares. With that in mind, here are three retail stocks that look set to soar.
Morrisons
While the UK supermarket sector is likely to continue to endure a challenging period, there is great potential on offer via Morrisons (LSE: MRW) (NASDAQOTH: MRWSY.US). That’s because it offers good value for money at its current price level, with Morrisons having a forward price to earnings (P/E) ratio of 13.1 versus around 16 for the FTSE 100. This shows that, while its top line may fall further this year, its rating could still move upwards over the medium to long term.
And, even though dividends have been slashed, Morrisons still yields an impressive 3.5%. With dividends being covered 1.8 times, they appear to be sustainable and offer growth potential moving forward.
Boohoo.Com
Shares in Boohoo.Com (LSE: BOO) have disappointed hugely since listing in March 2014. In fact, they have fallen by 67% and have shown little sign of turning this performance around, being down 14% in the last month alone. And, while it is difficult to catch a falling knife, Boohoo.Com offers huge potential.
For example, it is expected to increase its bottom line by 43% this year and by a further 27% next year. And, with consumer spending set to increase, such strong growth figures could prove to be very realistic and achievable. Furthermore, Boohoo.Com offers excellent value for money (which has been aided by its aforementioned share price fall), with it having a price to earnings growth (PEG) ratio of just 0.5. As such, its shares could turn the tables on disappointing past performance over the medium to long term.
Debenhams
Shares in Debenhams (LSE: DEB) have easily outperformed the FTSE 100 this year, being up 27% versus 6% for the wider index. Despite this, they continue to offer excellent value for money, with them having a price to earnings (P/E) ratio of 13 versus 16 for the wider index. This indicates that, with Debenhams expected to increase its net profit at a similar rate to the FTSE 100 next year, it is becoming increasingly difficult to justify such a wide valuation discount, which bodes well for the company’s investors.
Furthermore, Debenhams remains a top notch income play. It currently yields 3.6% and, with it having a dividend payout ratio of just 47%, there is significant scope for rising dividends alongside increased investment in the business. As such, now appears to be a great time to buy a slice of Debenhams.
