Should you buy these two retailers after their Brexit updates?

Are these two stocks bargains or bargepoles?

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Retail was one of the hardest hit sectors when Britain voted to leave the EU in June. Investors sold high street names indiscriminately over fears that Brexit would damage the economy and play havoc with consumer confidence.

However, early indications are that while some retailers are in for a tough time, others could prosper. Indeed, the blanket sell-off could have offered up some bargain buys.

Shoe Zone (LSE: SHOE) and Carpetright (LSE: CPR) both released trading updates this morning. Could either, or both of these companies be Brexit bargains?

Down at heel?

Shoe Zone’s shares jumped 12% in early trading after the company said it had “traded well” in the second half of its financial year ended 1 October, which includes the key back-to-school period. Significantly, chief executive Nick Davis added: “We have seen little impact from the EU Referendum.”

Like most retailers with large bricks-and-mortar estates, Shoe Zone has a programme of rationalising its portfolio by weeding out smaller lossmaking stores. As a result, management expects revenue for the year to be down 4% at £160m, but “pre-tax profit for the period to be broadly in line with expectations and marginally ahead of the prior year.”

I reckon top-line growth will resume in the coming year. The group is trialling an out-of-town format with a wide range of third party brands and says “the early signs are very encouraging”. Meanwhile, its core offering at the value end of the market could benefit from trading down, if there’s consumer belt-tightening from Brexit. Indeed, I recently used the store myself for the first time, contributing £17.99 to the company’s revenue with the purchase of a pair of black leather Oxford shoes.

At a share price of 160p, Shoe Zone is trading in value territory on a trailing P/E of 10 with a 6.1% dividend yield. And with net cash on the balance sheet of £15m, representing 30p a share, I reckon this stock could be a canny buy.

Floored by Brexit?

Carpetright’s shares fell 3% when the market opened, but have recovered to 195p, which is little changed from yesterday’s close.

The company reported a 2.9% decline in UK like-for-like sales for its half-year to 22 October. In contrast to Shoe Zone, net store closures aren’t improving profitability. The margin outlook has deteriorated, with the company now expecting a decline in gross profit percentage of between 150 and 200 basis points. “Competitive market conditions” is one factor and “increased sourcing costs resulting from the devaluation of sterling” is another.

Meanwhile, in Europe, the company said trading was “a little ahead of our expectations.” Like-for-like sales improved 0.9% (at local currency) and management has maintained full-year guidance of an increase in gross profit percentage of between 100 and 150 basis points. As a result, for the group as a whole, “full-year profit expectations are unchanged.”

Carpetright trades on a similar P/E to Shoe Zone but currently offers no dividend as it tries to turn around its business. Sterling weakness since the referendum is clearly having an adverse impact on the company, and carpets and beds are always a much tougher sell than shoes when consumers are feeling the pinch. For these reasons, Carpetright doesn’t appeal to me as an investment at this stage.

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.

G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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