Homewares and clothing retailer Laura Ashley (LSE: ALY) is a major faller today. Its shares were down over 10%, shortly after it released a profit warning. Trading conditions have remained challenging, and the company has therefore reduced its guidance for the full year. It’s also decided to not pay a dividend for the first half of the year.
Clearly, its future prospects are highly uncertain. But with the UK economy showing signs of resilience, could it be worth a closer look for less risk-averse investors?
A difficult period
The first half of its financial year has been tough for the business. Consumer confidence has remained at a low ebb, with higher inflation causing household budgets to decline in real terms. This situation is expected to continue throughout the remainder of the year, with the Bank of England unlikely to deliver more than a couple of interest rate rises in the coming months. This may be insufficient to make a major impact on inflation – especially with time lags factored in.
As such, the company’s decline in total sales of 7.7% versus the same period of last year could be a continuing trend. In addition, the weakness of sterling had a negative impact on Laura Ashley’s profitability in the half. It declined to £4.3m on a pre-tax basis, which is significantly lower than the comparable period’s figure of £7.8m.
A potential recovery?
But H1 also saw further progress with online sales. They increased by 5.1% to £26.9m, and a new license partner was signed for Thailand. Furthermore, there is scope for additional growth as the company introduces a new digital platform in the second half of the year. And with further growth potential in Asia following the termination of its license agreement in Japan, Taiwan and Hong Kong, the stock could deliver a recovery in the long run.
In the short run, though, there could be further disappointment for investors in Laura Ashley. As such, there may be lower-risk turnaround opportunities available in the retail space.
Turnaround opportunity
One potential recovery play could be Debenhams (LSE: DEB). It has endured a hugely difficult few years, seeing profitability fall dramatically. With the UK consumer outlook being challenging, it’s expected to report a fall in earnings of 40% in the current year.
However, investors seem to have anticipated further profit declines. The stock now trades on a forward price-to-earnings (P/E) ratio of around 7.5. This suggests they have factored in potential difficulties, and this could mean there’s a wide margin of safety on offer. That’s especially the case since the company is due to return to positive earnings growth of 3% next year.
While Debenhams has put in place an ambitious and slightly leftfield growth strategy which focuses on ‘social shopping’, it could offer high rewards. While risky and potentially volatile, the stock could be a strong performer in the long run for less risk-averse investors.