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Why I’d Buy Debenhams Plc, WH Smith Plc and NEXT plc, But Sell Mothercare plc

Retail investors had plenty to get their teeth into this morning, with trading from Debenhams (LSE: DEB), WH Smith (LSE: SMWH) and Mothercare (LSE: MTC).

In this article I’ll take a look at the news, and explain why I’d be happy to buy shares in some — but not all — of these household names. I’ll also look at why I believe NEXT (LSE: NXT) could still be a superior buy.

Debenhams

Shares in department store chain Debenhams climbed 5%, after the firm said that total sales had risen by 2.3% to £1.6bn during the first half of its current financial year, while earnings per share had climbed to 5.9p.

Debenhams’ 1p interim dividend was maintained, and the firm reported a meaningful reduction in net debt, which fell from £361.5m to £297.3m.

WH Smith

WH Smith shares eased back from record highs this morning, despite a 4% rise in group pre-tax profits, and a 10% rise in earnings per share for the six months to the end of February.

The interim dividend was increased by 12%, to 12.1p, but sales are still falling at the firm’s high street stores, where like-for-like sales fell by 4% during the first half of the financial year.

Mothercare

Fourth-quarter sales rose by 4.1% at Mothercare, thanks mainly to a long-awaited turnaround in UK sales, which rose by 1.5%, a gain powered mainly by a 31.8% surge in online sales.

Mothercare shares rose by 5% this morning, meaning that shareholders who bought into last October’s lows have seen a 37% gain in just six months.

Today’s best buy?

Here’s how these three retailers, plus Next, compare after today’s moves:

 

Debenhams

WH Smith

Mothercare

Next

2015 forecast P/E

11.6

16.3

31.5

17.0

2015 prospective yield

4.1%

2.8%

0%

4.0%

Operating margin

5.8%

10.3%

2.4%

20.6%

Debenhams continues to look cheap after today’s gains, and offers an attractive yield.

WH Smith, despite falling like-for-like sales, has a strong record of cost-cutting and profit growth and an attractive 10.3% operating margin, which highlights the extra profitability of its travel business.

Next offers an attractive yield and industry-leading operating margins, and has a strong track record returning surplus cash to shareholders through special dividends and share buybacks.

In this company, I reckon Mothercare looks outclassed: the store’s earnings per share would have to double for the current share price to look appealing, but earnings are only expected to rise by around 30% in 2016.

There’s also no dividend, and if I were a Mothercare shareholder, I would take profits and sell after today’s gains.

However, if you're still undecided, then there is a fifth UK retailer I believe you should consider.

The company concerned also offers high profit margins, strong growth and a strong balance sheet.

It's also in the middle of a massive online growth surge which the Motley Fool's experts believe could lead to sales growth of 200% in just five years!

To find out more, download "3 Hidden Factors Behind This Daring E-commerce Play" today -- it's FREE and completely without obligation.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.