So far 2016 has been a rough year for retailers. After entering the year off the back of a strong 2015, many retailers were trading at premium valuations, valuations that left little room for error if things didn’t pan out as planned.
Unfortunately, 2015’s buoyant retail environment hasn’t continued into 2016, and many retailers are already reporting slowing sales.
The market has punished these companies by downgrading their valuations aggressively lower following these profit warnings. For example, shares in Sports Direct International (LSE: SPD) have lost more than 30% of their value this year after the company reported a tough Christmas trading period and then this month, founder Mike Ashley warned that the retailer was “not trading very well.”
Sports Direct’s profits are now expected to be near the bottom of the £380m to £420m range it published when it blamed warm weather for poor trading over Christmas. In its last financial year, the group made £383.2m of earnings before interest, tax, depreciation and amortisation. Still, despite the lack of growth after recent declines Sports Direct is now trading at a relatively attractive valuation. The company’s shares trade at a forward P/E of 9.7 for the year ending 30/04/2016.
Income champion
Sports Direct’s depressed valuation could attract bargain hunters, but the company doesn’t pay a dividend to shareholders. And if you’re looking for income, Marks and Spencer (LSE: MKS) could be the answer to your prayers.
Shares in Marks have fallen by 11% so far this year and are down 25% over the past 12 months. However, after recent declines the company’s shares have dropped to a more modest valuation of 11.5 times forward earnings and City analysts are expecting the company’s earnings to grow by a steady 3% to 8% per annum during the next three years. Further, the shares currently support a dividend yield of 4.4%, and the payout is covered 1.8 times by earnings per share.
Fall from grace
A tougher than expected trading environment has also weighed on the shares of Restaurant Group (LSE: RTN), which have lost nearly half their value this year after two profit warnings. Last year the group’s shares commanded a premium valuation of 22.2 times forward earnings, but now the valuation has fallen back to earth.
Restaurant Group’s shares currently trade at a more modest forward P/E of 11.4 and support a dividend yield of 4.5%. That being said, according to current City estimates, Restaurant Group’s earnings growth is on track to grind to a halt this year. The company’s growth days may be behind it.
Dividend champion
Lastly, NEXT (LSE: NXT), which has seen its share price plunge by a quarter year-to-date.
Last week, Next’s management warned that the trading environment was tougher than expected and the company’s competitive advantage over peers was being eroded. Nonetheless, while Next’s growth may slow going forward, the company is still planning to achieve some growth and Next is well known for its cash returns to investors. Current City figures suggest Next’s earnings per share will expand by 4% for 2017, and the company’s shares are expected to support a dividend yield of 7% for the next few years when special dividends are included.
