British retail sales surged higher during August, rising at the fastest pace in six months, while retailers’ optimism about the business situation for the next quarter hit its highest level since May 2002.
However, retail stocks Debenhams (LSE: DEB) French Connection (LSE: FCCN) Supergroup (LSE: SGP) Bonmarche (LSE: BON) and Marks and Spencer (LSE: MKS) have had a terrible six months with only one — French Connection — putting in a positive performance.
But with optimism surging across the sector, is now the time to buy?
All retailers have had mixed fortunes this year. For example, Debenhams — after warnings on profits at the end of last year — has seen its shares decline 6.4% year to date excluding dividends. Declines over the past 12 months have come close to 40%.
Nevertheless, the company has recently attracted value hunters as recent declines have left the stock trading at a forward P/E ratio of 9.2. At present levels the company also supports a dividend yield of 4.9%. Moreover, City analysts believe that the company’s trading performance has picked up over the summer months.
But while value hunters have turned to Debenhams, growth investors have turned their backs on Supergroup, thanks in part to the company’s slowing earnings growth.
Specifically, Supergroup currently trades at a forward P/E of 18.2, with earnings growth of only 13% pencilled in for next year, down from growth of 21% reported last year. Unfortunately, management has decided that, for the time being it would rather reinvest cash generated from operations, rather than initiate a dividend.
French Connection has been one of the retail sector’s best performers this year. Management has accomplished this by actually going upmarket!
On an underlying basis, the company’s sales jumped 9.1% like for like over the summer period, as the company reduced the number of discounts in stores. French Connection is not forecast to make a profit until 2013, although with nearly £13m in cash on the balance sheet, French Connection is a favourite amongst value investors.
Time to make a move?
With French Connection and Debenhams expected to report a strong trading performance for the summer months, they appear to be some of the retail sector’s best picks. However, the old guard, M&S, as well as one of the sector’s newest members, Bonmarche, appear to be struggling.
M&S reported a terrible first quarter at the beginning of July, with UK non-food or general merchandise like for like sales falling by 1.5% — the 12th consecutive quarter of declines. Additionally, M&S.com sales fell by 8.1%during the quarter, compared to a gain of 23% over the last full financial year.
Bonmarche has fallen on valuation grounds. The company’s sales are rising, up a total of 16.9% during the 13 weeks ended 28 June 2014 but a valuation of 14.3 times forward earnings has scared some investors.
Still, as retail sales pick up and filter through results, investors should start to note an improvement in sales, which should give a valuation uplift across the retail sector.
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