Do not mention the UK retail sector to investors these days: it’s never cheap enough.
While that view holds true for most food retailers, in the non-food world one may beg to differ. Ted Baker (LSE: TED) is a valuable proposition, for instance, while Burberry (LSE: BRBY) looks a tad overvalued, but it remains a strong business that should not be overlooked.
Ted Baker (Market Cap £881m)
Its three-year performance reads +165%. In recent times, however, the stock has been under pressure and is down 9% this year. Why so?
Latest figures, expansion plans and a strong track record signal that Ted Baker deserves attention. Ted Baker today released an interim statement for the 19-week period from January 26 to June 7, which made for a good reading. As the business grows, profits rise and online sales thrive.
Its revenue and operating profit have doubled to £320m and £40.6m, respectively, in the last four years, and they are both expected to double by the end of 2018. It net income margin hovers around 9%, while earnings per share are steadily growing.
Its operating cash flow profile is healthy and supports growth in capital expenditure. If anything, one could argue that a balance sheet carrying just £37m of debt, and a gross cash position of £28m, could become “more efficient”, given that more debt – i.e. higher leverage – would boost return on equity. Leverage in the retail sector is risky, but could reward awesomely if debt capital is properly deployed.
Burberry (Market Cap £6.5bn)
Lots has been said and written about Burberry in recent times. Quite simply, the British fashion house is underperforming and is finding it difficult to live up to its excellent standards. What appears evident is that investors have less faith in the combination of “luxury + emerging market”, which dominated the headlines in the wake of the credit crunch. As such, the valuation of Burberry has been impacted.
In the last 12 months, shareholders have enjoyed a capital gain slightly above UK inflation. Its dividend yield is lower than that of the FTSE 100, and the index has outperformed Burberry by 3.4 percentage points in the last 12 months. The two have recorded a similar performance year to date.
As its growth rate slows down, investors wonder whether its valuation is appealing. Burberry is not cheap, and based on its trading multiples, it looks a tad overvalued. Still, as long-term growth in emerging market may be restored, Burberry should be on the radar. A takeover should not be ruled out.
SuperGroup (Market Cap £927m) & boohoo.com (Market Cap £523m)
SuperGroup (LSE: SGP), the owner of the Superdry label, has had a poor run on the stock market this year, with its stock down 21%.
SuperGroup has done better than boohoo.com (LSE: BOO) — an online fashion retailer whose relative valuation is completely out of whack with reality — but Burberry and Ted Baker have outperformed it by 20 and 12 percentage points, respectively, in 2014.
SuperGroup did not meet bullish estimates from analysts in May when the pinch was felt, but the real problem is that as it grows, margins shrink. This trend has been visible in the last four years and it looks like it may be a major issue in months to come.
Alessandro doesn't own shares in any of the companies mentioned. The Motley Fool has recommended shares in Burberry.