The UK economy continues to face an uncertain future. Much of this has been caused by Brexit, with a weak pound leading to higher inflation. This has the potential to shift consumer spending habits, with wages now growing at a slower pace than inflation.
While this may mean a difficult short-term outlook for retailers, it could also present an opportunity to buy them while they offer wide margins of safety. With that in mind, here are two retailers which could be worth buying for the long term.
Strong performance
Wednesday saw the release of a first quarter trading update from value retailer B&M (LSE: BME). The company’s revenue increased by 18.3% despite challenging trading conditions and economic uncertainty. In the UK, its like-for-like (LFL) sales growth was 7.3%, with it benefitting from a strong performance from grocery sales.
The company opened nine new UK stores in the quarter, as well as four in Germany. It also has a strong pipeline of new stores planned for the current year. They could provide a catalyst on its top and bottom-line growth rate.
In fact, B&M is planning to open between 40 and 50 new stores in the UK in the current year. It also anticipates having a German estate of 90 stores by the end of the year. This should provide the business not only with more scale, but also more diversified operations.
With consumers likely to trade down to cheaper alternatives now that inflation is higher, B&M could be well placed to benefit from an economic tailwind over the medium term. With the company having a price-to-earnings growth (PEG) ratio of just 1.1 as it offers 15%-16% earnings growth in each of the next two years, it could prove to be a sound buy at the present time.
Turnaround potential
Also offering investment potential within the UK retail sector is Laura Ashley (LSE: ALY). It is a very different business to B&M, since it targets a premium market. It has struggled in previous years and has seen profit decline at a double-digit rate in each of the last two years. Further profit falls are anticipated this year, which could keep investor sentiment at a relatively low ebb.
However, the market now seems to have factored-in the company’s difficult outlook. Laura Ashley trades on a price-to-earnings (P/E) ratio of 8.5 – even when this year’s 35% forecast fall in net profit is factored-in. Therefore, there could be upward rerating potential on offer.
One catalyst to encourage a more positive valuation could be the company’s turnaround prospects. Under its current management team, the company is expected to record a return to growth in the next financial year. Forecast earnings growth of 17% puts the company’s shares on a PEG ratio of just 0.5, which suggests that now could be the right time to buy the stock for the long run.
