Clothes giant Next (LSE: NXT) — seen by many as a barometer of the health of the UK high street — has sent the retail sector into a lather after issuing not one but TWO profits downgrades in less than as many months.
The company has warned that the strength of consumer spending is in danger of slumping in the months ahead.
But Next’s bearish assessment aside, I believe there are plenty of retail gems out there that should keep delivering chunky profits growth.
Let’s talk Ted
With its store expansion scheme clicking through the gears, I reckon designer darling Ted Baker (LSE: TED) is in great shape to deliver stunning earnings expansion in the near term and beyond. Indeed, the London firm saw revenues leap 18% last year as demand took off across the globe.
My bullish take is shared by the City, and Ted Baker is expected to see earnings surge 10% and 14% in the years to January 2017 and 2018.
At face value, P/E ratios of 20.9 times for this year and 18.3 times for 2018 may appear a tad heady. But I expect these multiples to keep toppling as Ted Baker’s togs fly off the shelves.
Death star
In line with Benjamin Franklin’s famous assertion that “death and taxes” are two of life’s only mainstays, I reckon Dignity (LSE: DTY) is a solid long-term growth selection.
The funeral directors suffered a knock on Monday after announcing that last year’s “abnormally high” death rate caused first-quarter revenues to struggle in light of strong comparatives — revenues dipped 5% during January-March to £81.2m.
However, last quarter’s result also reflects the fruits of Dignity’s funeral home acquisition programme, with sales up 18% from the same period in 2014. The company predicts that the death rate this year to be similar to that of two years ago.
The City expects earnings at Dignity to dip 3% in 2016 before bouncing 9% in 2017. I reckon consequent P/E ratios of 22.5 times and 20.7 times are fair value given the firm’s strong defensive qualities.
Cards colossus
The cheap greetings offered up by Card Factory (LSE: CARD) makes the retailer a terrific bet in an increasingly price-conscious shopping landscape, in my opinion.
On top of this, a steady stream of store roll-outs is also boosting the top line at Card Factory — revenues rose 8% in the year to January 2016 to a record £381.6m, helped by the opening of 50 new outlets.
Against this backcloth, the number crunchers expect Card Factory to enjoy earnings growth of 4% and 7% in 2017 and 2018, resulting in decent P/E ratings of 18 times and 16.7 times.
Driving higher
With car sales continuing to surge, I believe vehicle dealership Lookers (LSE: LOOK) is also in great shape to keep delivering chunky earnings expansion.
The Society of Motor Manufacturers and Traders announced on Friday that new car sales rose 2% last month, to some 189,505 units. This represented the strongest April performance since 2003.
While new car sales are obviously helping to power sales at Lookers, the company is also enjoying robust demand for used vehicles, not to mention for its aftersales services. This widescale strength helped propel revenues 20% higher in 2015, to £3.65bn.
And the City expects this strong momentum to keep going. Earnings rises of 7% and 6% are chalked in for 2016 and 2017, figures which yield bargain-basement P/E ratings of 8.3 times and 7.8 times.
