Today’s update from Marks & Spencer (LSE: MKS) is rather mixed, with the company reporting upbeat food sales and rather disappointing clothing and home sales. For example, food sales increased by 4% versus the comparable period and this allowed M&S to grow its market share to 4.3%. Furthermore, its new store opening programme is performing ahead of expectations.
However, sales in the company’s clothing and home division dropped by 1.9% due in part to a reduced proportion of sales on promotional discount. And while gross margins in the division are now expected to be higher than last year, there’s still more work to do to turn around a falling top line.
With M&S forecast to increase its bottom line by 6% in the current year and by a further 8% next year, it appears to be performing in line with the wider market. However, its price-to-earnings (P/E) ratio of just 11.8 indicates that it’s undervalued and therefore could be about to deliver strong capital gains over the medium term. That’s especially the case since a new strategy to attempt to turn around its mixed performance seems likely and could positively catalyse investor sentiment in the stock.
On the rise
Of course, the retail sector includes other notable investment opportunities. One prime example is Morrisons (LSE: MRW), which is benefitting from improved investor sentiment as a result of its new strategy. The company is seeking to become more efficient and its decision to focus on core activities and to leverage its food production capabilities seems set to have a positive impact on its bottom line.
For example, Morrisons is forecast to increase its earnings by 36% in the current year, and by a further 9% next year. This puts it on a price-to-earnings-growth (PEG) ratio of only 0.5 and indicates that its shares could continue their rise of 37% since the turn of the year. And while the UK supermarket sector remains highly competitive, Morrisons seems to have unlocked the right strategy through which to turn its business around. For this reason, it seems to be a marginally better buy than M&S, although the latter continues to offer excellent total return potential.
Falling star?
One retailer that has struggled of late is Next (LSE: NXT). Its shares have slumped by 26% since the turn of the year and this is at least partly due to a cautious outlook being adopted by the company’s management team. This has created considerable uncertainty among investors and with Next forecast to increase its bottom line by just 4% this year and 5% next year, it lags the likes of Morrisons and M&S when it comes to earnings growth.
However, after its recent share price fall, Next now seems to offer good value for money. It trades on a P/E ratio of just 12, which for a high quality business with considerable customer loyalty seems to be a very fair price to pay. Although near-term falls in its share price cannot be ruled out, Next seems to be a strong buy, although the likes of M&S and Morrisons seem to be better options at the present time.
