UK retail is experiencing a challenging period. Not only is the sector witnessing the continued shift of shoppers towards online options, demand is at a low ebb due to concerns about the future of the UK economy.
As a result, FTSE 100 retailers such as Next (LSE: NXT) trade at historically-low price levels. This could suggest they offer wide margins of safety. As such, could now be the right time to buy the stock for the long term? Or, does another FTSE 100 company with retail exposure offer a better outlook after recording a share price decline in recent months?
Uncertain future
That company in question is ABF (LSE: ABF). It released a brief trading update on Friday which was somewhat disappointing. Its fashion retail unit Primark recorded a tough start to the financial year, experiencing tough trading conditions. This may not be a major surprise to some investors, since the wider retail sector is experiencing weak demand. However, Primark has a track record of outperforming its peers during challenging operating conditions, since its no-frills-value focus usually resonates with cash-strapped shoppers.
Certainly, ABF has a number of other business units which could pick up the slack. But if Primark is unable to deliver growth as per expectations, then it could lead to further disappointment for the company’s share price following a fall of 20% in the last year. Even after such a large decline, the stock has a price-to-earnings (P/E) ratio of around 16. This suggests that it may lack investment appeal relative to some of its cheaper sector peers.
Resilient outlook
While Next may also experience tough trading conditions, its share price appears to factor this in. The company has a P/E ratio of around 11 at the present time, which is historically cheap for the stock. Furthermore, it has a track record of delivering impressive sales and profit performances even at times when the wider retail segment is experiencing challenging operating conditions.
One reason for this seems to be the company’s ability to adapt to changing consumer tastes. In its annual report, the retailer discussed its increasing focus on leisure spending, recognising that consumers are spending a greater proportion of their disposable income on leisure activities rather than on retail. As a result, it has begun offering improved customer experiences which incorporate eating and social opportunities within its stores.
Alongside this, Next is continuing to invest heavily in its online offering as it seeks to adapt to the increasing popularity of services such as click-&-collect. A subscription which enables unlimited deliveries could prove popular among customers, while a more efficient supply chain appears to be making its offer more appealing to consumers.
Although the company could experience an uncertain period, a mix of a sound strategy and a low valuation may mean that it offers significant investment potential for the long term.
