Despite the gloom and doom on the High Street it seems there are a few clear retail winners. Take JD Sports Fashion as an obvious example or another I want to look at in this article, homewares retailer Dunelm (LSE: DNLM).
Good news
Just last week, the retailer released a trading update stating that it expected pre-tax profit to be ahead of expectations, driven by good weather and strong trading across its businesses. The company forecast pre-tax profits to be in the range of £124m to £126m, compared with £102m in 2018.
This follows on from a strong third quarter update in April. In that quarter, total like-for-like (LFL) revenue rose by 12.5%, continuing the growth trend from the first half of the year. In terms of growth, online was the biggest grower as its LFL revenue shot up by 32.1%, but stores contributed as well, rising 9.8%.
Investors have been responding positively to the news from the retailer and its shares have been shooting up, which has pushed down the yield and increased the P/E so it’s now over 24. This makes it more expensive even than retail star JD Sports, which has a P/E of ‘only’ 20, despite a string of growth initiatives such as expanding into the US. This could indicate that Dunelm is too expensive. But it seems to have momentum and I think it could be a worthwhile long-term play for a Stocks and Shares ISA. It has shown it can pick up sales even as its market peers are struggling and it should be able to gain market share as it pushes deeper into the e-commerce market. I’d buy.
Moving online
Boohoo (LSE: BOO) may be even better positioned to deliver faster growth for investors, despite its eye-watering current price. It’s online only, sidestepping any concerns about the death of the high street that are acting as a drag on the share prices of other retailers.
Nevertheless, the fashion retailer isn’t for the faint-hearted. Its share price has been a rollercoaster ride and any bad news is likely to be punished harshly – as we have seen with ASOS previously – given the P/E is a little over 50.
But the reason for the high price-to-earnings number is Boohoo’s phenomenal growth, which shows no signs of slowing down, meaning investors who jump on the bandwagon could still have a fun and rewarding ride. In the first quarter, it posted slightly higher-than-expected sales growth and left its full-year guidance for top line growth unchanged.
The retailer reported a 39% jump in total sales for the three months to 31 May to reach £254.3m. It also reiterated its guidance for full-year revenue growth of 25% to 30%, projecting an EBITDA margin of around 10%.
Given the rate of growth, the share price hasn’t exactly been flying up, which could make now a good time to add this high growth retailer to a Stocks and Shares ISA. I see Dunelm as a strong play on the future as it moves online, but Boohoo is a major player in e-commerce already so I think its high price is fully deserved.
