J Sainsbury plc, Sports Direct International Plc & AO World PLC: Which Retailer Will Win This Christmas?

Forget Black Friday. For British retailers Christmas is the most important period of the year. In fact, for many companies it is make or break in terms of whether the entire financial year will be successful or not.

As ever, predicting who will be the winner is extremely challenging, since the Great British public are inevitably difficult to second-guess when it comes to how much they will spend and where. What is clear, though, is that this Christmas could be a big one for all retailers since it is the first year in which wage growth is outpacing inflation since the start of the credit crunch. As such, shoppers may have more to spend than in previous years.

This would undoubtedly be good news for J Sainsbury (LSE: SBRY) since the supermarket has endured a hugely challenging period in recent years. It has lost a significant proportion of customers to no-frills, discount operators such as Aldi and Lidl but, this year, it could perform relatively well under a new pricing strategy. In fact, Sainsbury’s is not seeking to beat its rivals on price, but instead is focused on value; especially regarding its own brand products.

Clearly, Sainsbury’s has a strong reputation for the quality of its own-brand goods and, when combined with higher disposable incomes in real terms, this could lead to increased sales versus its cheaper peers. Furthermore, Sainsbury’s has attempted to expand margins under its new pricing strategy, which is positive for the company’s bottom line. And, with Sainsbury’s trading on a price to earnings (P/E) ratio of 11.5, even if Christmas does disappoint its long term outlook as an investment remains appealing.

Of course, AO World (LSE: AO) is having an even tougher period than Sainsbury’s, with the online seller of electrical goods today reporting a loss for the first half of the year, with the shares falling over 15% in morning trade as a result. A key reason for this is investment in Germany as well as other start-up costs, with a pretax loss of £8m being recorded versus a pretax profit of £0.8m in the first half of 2014.

Looking ahead, AO World has the potential to expand across Europe, with the Netherlands today being announced as a new territory in which AO will trade in future. This expansion is expected to lead to strong profit growth over the medium to long term but, while the company’s top line may be given a boost by an improved Christmas trading period, its shares trade on a P/E ratio of 185, which indicates that they are fully valued.

Meanwhile, Sports Direct (LSE: SPD) also has international expansion potential, with continental Europe becoming an increasingly important space for the company as well as Ireland, where Sports Direct recently agreed to purchase 100% of the Heatons chain.

While many of its retail peers have struggled in recent years, Sports Direct has increased its bottom line at a rapid rate. This is showing little sign of slowing down, with the company poised to increase its earnings by 11% this year and by a further 15% next year. And, with it trading on a price to earnings growth (PEG) ratio of just 0.9, it appears to offer good value and capital gain potential, too. As such, it seems to be a sound purchase at the present time ahead of what is set to be another relatively upbeat Christmas trading period.

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Peter Stephens owns shares of Sainsbury (J). The Motley Fool UK has recommended Sports Direct International. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.