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Is Halfords Group plc Now A Better Buy Than Marks and Spencer Group Plc?

Shares in Halfords Group (LSE: HFD) are down nearly 7% as I write, thanks to news that the firm’s chief executive, Matt Davies, is leaving to run Tesco’s UK business.

It’s been a disappointing morning for Marks and Spencer Group (LSE: MKS) (NASDAQOTH: MAKSY.US) shareholders, too — shares in the high street stalwart are down by 4% following a pretty dismal Christmas trading update.

Yet the two situations are quite different.

Halfords’ strategy appears to be on track. Cycling and leisure sales are booming, and the firm is adapting its car strategy to reflect the reality that most people don’t work on their own cars any more.

The departure of Mr Davies, while disappointing, shouldn’t have any effect on the near-term performance of the business.

In contrast, Marks and Spencer’s like-for-like clothing sales fell by a whopping 5.8% during the third quarter, missing analysts’ expectations for a more modest 3% decline.

The firm blamed the warm weather and the chaotic roll-out of its new distribution centre in December, but in my view these problems are just being used to disguise the underlying trend, which is that clothing sales keep falling.

A 2.8% increase in Food sales is probably the only reason M&S managed to avoid a profit warning this morning, but even here, I have concerns. Food sales from stores open more than one year only rose by 0.1% during the third quarter, which included the key Christmas period.

During the same period last year, these like-for-like Food sales rose by 1.6%, suggesting to me that M&S Food growth may be tailing off.

Today’s best buy?                                         

Which of these two retailers makes the best buy, in today’s market?

Here’s how the two compare, using the latest City forecasts:

2015 forecast

Marks and Spencer

Halfords

Earnings per share growth

-2.1%

+5.3%

P/E

13.6

13.9

Prospective yield

4.0%

3.6%

Both companies have similar valuations, but even before today’s update, Marks and Spencer was expected to report a 2% fall in earnings for the current financial year, which ends in March.

Although M&S is expected to increase its dividend by 4%, this could now be a struggle.

Halfords, in contrast, is expected to report a solid 5.3% increase in earnings per share, along with a 7.8% dividend hike that would take the firm’s payout up to 15.4p per share.

M&S expects cost savings to help contribute to its profits this year, but I’d prefer Halfords’ mixture of higher profit margins and rising earnings: in my view, Halfords is clearly a better buy than Marks and Spencer in today’s market.

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Roland Head owns shares in Tesco. The Motley Fool UK owns shares in Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.