Can Patisserie Holdings plc Beat J Sainsbury plc In 2016?

I love a decent retail rollout story because such investment propositions can go on to provide us with multi-bagging shares.

The theory is that once a firm develops a winning formula at one location it can roll out its offering into more and more locations. As long as operations remain profitable, that’s a well-proven strategy for growth and steadily rising share prices.

Up and rolling

Patisserie Holdings (LSE: CAKE) shapes up well as an interesting rollout that’s already rolling at a fair pace. The firm describes itself as a UK branded café and casual dining group and its trading brands are Patisserie Valerie, Druckers, Vienna Patisserie, Philpotts, Baker & Spice, and Flour Power City Bakery.

The recent full-year results revealed some interesting double-digit financial growth figures, and the company now operates 166 stores, having opened 26 new ones over a fourteen-month period. For 2016, Patisserie Holdings targets a further 20 store openings, suggesting a pleasing pace for the rollout.

A strong heritage

Patisserie Valerie outlets account for 116 of the firm’s stores making it the largest format in the portfolio. The brand offers a ‘fine tea and cakes’-style café experience, with a heritage stretching back to the original founder’s first store in London, established during 1926. However, Patisserie Holdings only floated on the FTSE AIM market in 2014. Since then, the shares have done well, rising almost 90%.

At today’s 380p share price, Patisserie Holdings trades on a forward price-to-earnings (P/E) ratio of nearly 27 for 2016. That sounds expensive, but established rollouts rarely sell cheap and there could be much more growth to come. If the growth rates hold up going forward, there’s every reason to expect the P/E rating to hold up too, implying the possibility of further share-price growth. Patisserie Holdings is worthy of further research and a place on my watch list.

A rather different story

The situation could not be more different for troubled supermarket chain J Sainsbury (LSE: SBRY). The supermarket sector’s infighting and price battles seem like sideshows compared to the structural threat from discounters Aldi and Lidl, which is real, and quantified — those two retailers took 10% of Britain’s grocery spend recently, doubling their market share in just three short years, according to market researchers Kantar Worldpanel. Aldi and Lidl are not stopping there, I’d wager.

We need only look at Sainsbury’s interim results from last month to see the damage. Underlying sales were down 2%, underlying pre-tax profit plunged 17.9%, return on capital employed slid 18%, and the firm slashed the dividend by 20% compared to a year ago.

Of the big four — Asda, Tesco, Morrisons and Sainsbury’s — I’ve long thought of Sainsbury’s as the firm executing its operations most effectively. However, I’m very reluctant to invest in the firm now. The figures are almost like the opposite result from trading compared to what Patisserie Holdings is achieving.

Can Sainsbury’s recover?

Anyone holding J Sainsbury shares now will no doubt be counting on the firm’s cheap-looking valuation and hoping that the company can turnaround its fortunes. I can see the attraction. At today’s 238p share price the firm trades on a forward P/E rating of just 11 for year to March 2017 and the forward dividend yield runs at 4.3% with the payout covered more than twice by City analysts’ estimate of forward earnings. However, I’m worried about the attrition of market share that the established supermarkets face and see the sector as managing permanent decline.

I think such market dynamics could manifest as a steadily falling share price for the likes of Sainsbury’s, so I would rather invest in an up and coming firm such as Patisserie Holdings.

As an alternative to Patisserie Holdings, I also like a mid-cap firm enjoying strong growth that looks set to continue for 2016

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Kevin Godbold 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.