Today’s full-year results leave us in no doubt that Poundland plc (LSE: PLND) occupies a niche on the ‘happy’ side of the structural changes sweeping the retail market for ‘essentials’ in Britain.
On a constant currency basis, total sales are up 11.8%, like-for-like sales up 2.4% and underlying pre-tax profit up 18.6% — the firm’s business is flying.
The company reckons structural change occurred in shopping throughout the UK over the last several years, and Poundland played an important part in the outcomes.
When we think back, it seems clear that discounting retail firms prospered in the financially austere environment we’ve seen since last decade’s credit crisis. The discounters were on the rise before that, of course, but a value-hunting collective mindset seems well entrenched in the consuming populace, and it will surely remain for years to come.
A retail environment like that is fertile ground for new-order discount-retailing, and Poundland, Lidl, Aldi and others caused disruption to a number of sub-sectors in the retailing industry. We only need to look at the carnage in the supermarket sector with firms such as Tesco (LSE: TSCO) and Morrisons (LSE: MRW) to see the effects.
As Tesco and Morrisons fight to survive, let alone to thrive, Poundland — which sells a fair amount of food — is growing like mad. During the year, the firm opened 60 new stores across Britain and Ireland and plans to open a further 60 at least during the current year. Then there’s growth abroad as the company probes into Spain, fine-tuning its offering there and on track to place 10 outlets in the near future. The company has around 588 shops now, so these expansion figures are impressive. If the firm succeeds in its bid to take over rival 99p Stores, growth will receive a further boost.
The new ‘defensives’
The key indicators of strength at Poundland are those relating to sales. Tesco and Morrisons can aim to rebuild plunging profits all they like, but if the top line doesn’t grow, or worse still if it shrinks as it has been with those supermarkets, ultimately their businesses are going nowhere and neither is an investment in their shares.
We used to prize supermarkets for their steady and reliable cash flow, which allowed those firms to pay consistent dividends. Investors regarded them as ‘defensive’ investments, and low risk even if short on excitement, but not any more. The recent collapse in profits and share prices in the traditional supermarket sector stripped the supermarkets of their defensive credentials and turned them into struggling turnaround candidates — a far racier proposition than many conservative investors signed up to.
Will supermarkets ever come back? I wouldn’t bet on it. The new reality in the ‘essential’ retail market is here to stay. Structural change doesn’t suddenly change back again. That’s why I think it makes much more investing sense to align ourselves with the new order if we can rather than clinging to the old. We can’t invest in Aldi or Lidl because those firms are private limited companies, which is a pity. However, we can invest in new-order discounter Poundland and I think the firm is well worth running a slide rule over.
Poundland and other new-order discounting retailers are, potentially, the emerging defensive growth propositions of today. I'm avoiding the supermarkets all together and looking at firms such as Poundland and these five shares, which make good candidates for further research. They are strong, well placed in their sectors, and don't face structural change in their markets.
Kevin Godbold has no position in any shares mentioned. The Motley Fool UK owns shares of 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.