Which Of These Retail Stars Should You Buy: Tesco PLC, Lookers PLC Or Pets at Home Group PLC?

Royston Wild looks at the investment case over at Tesco PLC (LON: TSCO), Lookers PLC (LON: LOOK) and Pets at Home Group PLC (LON: PETS).

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Today I am looking at three High Street heavyweights all vying for your custom.

Leave listless supermarket on the shelf

The tenure of Tesco (LSE: TSCO) chief executive Dave Lewis is still to produce any meaningful, long-term turnaround strategy despite the new man being in the job since last September. With the supermarket remaining reliant upon margin-crushing discounting to attract shoppers back through its doors, whispers are becoming louder over whether Tesco is, in fact, powerless to defend its market share given the structural changes shaking the British grocery sector.

Indeed, as the competition from both budget and premium segments up the ante, Tesco is expected to see earnings dip for a fourth consecutive year during the current period, and a 3% decline is anticipated for the year concluding February 2014. And in a bid to repair its precarious balance sheet, the Cheshunt firm is also expected to slash the dividend yet again, from 1.16p per share last year to 0.93p in 2016, yielding a measly 0.5%.

Despite the retailer’s prolonged inability to fire revenues higher, the company still carries a massively-expensive earnings multiple of 23.2 times. To put that into perspective, any reading around or below 15 times is considered decent value. So with till activity backpeddling once again after a brief resurgence, and Tesco’s new rivals wielding ultra-aggressive expansion schemes, I believe that the supermarket is a high-risk gamble with very little cause for optimism.

Drive away with a bargain

But unlike Tesco, car dealership chain Lookers (LSE: LOOK) is not facing the same sales pressures as demand for new cars clicks through the gears. With rising wages and low inflation putting more money into peoples’ pockets, I believe that British car sales — which rose for their 39th successive month in May — should continue heading northwards.

And while Lookers continues to enjoy solid demand for both new and used cars, the firm’s decision to invest in its fleet operations is also paying off handsomely — gross profits here jumped 12% in January-March.

Although the business is expected to record just a marginal earnings improvement in 2015 — to 13.55p per share from 13.52p last year — Lookers changes hands on a very attractive earnings multiple of just 12.6 times. And this reading falls to 12 times for 2016 amid expectations of a 4% earnings improvement.

And the car seller’s progressive dividend policy adds a sweetener to the investment case, in my opinion. A predicted payment of 3.1p per share creates a handy 1.9% yield, and this reading edges to 2% for next year due to an estimated 3.4p dividend.

Chase after this hot growth stock

With consumers finding more weight in their wallets, sales at animal emporium Pets at Home (LSE: PETS) are also ticking higher as Britons choose to pamper their pooches and pussycats. The Cheshire firm announced this month that total sales leapt 9.6% in the year concluding March 2015 to £729.1m, helped in no small part by the success of its vet and grooming services where aggregated revenues exploded 25.2% during the year.

Accordingly, Pets At Home is embarking on an aggressive store opening scheme to cotton onto surging merchandise, food and services sales. Indeed, the business plans to open 20-25 new outlets in the current year alone, as well as up to 55 new vet practices and 60 more of its “Groom Rooms.” The City of course expects this programme to deliver big time, with analysts pencilling in earnings growth of 14% and 9% in 2016 and 2017 respectively.

These numbers leave Pets At Home changing hands on reasonable earnings multiples of 17.9 times and 16.3 times for these years, numbers that I expect to continue crumbling as the firm’s goal of becoming the one-stop shop for all of your pets’ needs pays off. As well, dividends are also expected to climb comfortably higher in the coming years, and a payout of 6p per share this year is expected to leap to 6.7p in 2017. Consequently the company sports tasty yields of 2.2% and 2.4% for this year and next.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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