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Will these bargain retailers surge higher in 2016? Sports Direct International plc, Marks and Spencer Group plc and Bonmarche Holdings plc

Mike Ashley’s appearance in front of a committee of MPs earlier this week was widely reported. But consumers have short memories. History suggests that the bad publicity Sports Direct International (LSE: SPD) has attracted recently will soon be forgotten.

The group still has a large share of the market for budget and mid-priced sportswear. Sports Direct’s track record also demonstrates that whatever his failings, Mr Ashley is a talented retailer.

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As such, investors may want to consider investing some of their own cash alongside the man who owns 59% of Sports Direct. Although the shares have fallen by almost 50% over the last year, profit forecasts seem to have stabilised.

Sports Direct currently trades on a 2016 forecast P/E of about 10. In my view, the shares could rise significantly if Sports Direct can return to steady growth. The only downside is that despite generating plenty of cash, Sports Direct doesn’t pay a dividend.

Is this 6% yield worth buying?

Investors looking for a reliable dividend are likely to choose Marks and Spencer Group (LSE: MKS) over Sports Direct.

Shares in M&S have fallen by 33% over the last year, pushing up the stock’s dividend yield to a tempting 5.8%. However, new boss Steve Rowe warned recently that the changes needed to transform the group’s struggling clothing business could put pressure on profits.

The big question for investors is whether the dividend is safe. Marks and Spencer generated £466m of free cash flow last year, after interest and pension deficit payments. This is equivalent to 28.7p per share — considerably more than 18.7p paid in dividends. Dividends covered by free cash flow in this way are usually very safe, but I do have a couple of concerns.

Marks and Spencer’s net debt of £2.14bn is now quite high, at 3.8 times last year’s post-tax profits. I’m also worried that the group’s free cash flow could come under pressure if Mr Rowe cuts prices and makes other changes to the clothing business.

I suspect the dividend will be safe, but I expect a turnaround to take some time. In my view, there’s no rush to buy as these shares may get cheaper.

An ‘under the radar’ bargain?

One clothing retailer that has caught my eye is niche womenswear group Bonmarche Holdings (LSE: BON).

Shares in Bonmarche have fallen by 60% over the last six months, following a profit warning in December that triggered a 20% reduction in earnings forecasts.

Investors will have breathed a sigh of relief this morning, when Bonmarche published full-year results in line with these revised forecasts. Underlying earnings of 18.3p put the shares on a trailing P/E of 6.9, while the total dividend rose by 5% to 7.14p. This gives Bonmarche shares an attractive trailing dividend yield of 5.7%.

The only fly in the ointment was that the group said trading for the current year had “continued to be tough due to poor weather”. Chief executive Beth Butterwick said that hitting full-year expectations would require “trading conditions [to] normalise”.

Bonmarche shares currently trade on a 2017 forecast P/E of just 6.4. This suggests the market isn’t yet convinced that the firm’s earnings will recover this year. If you take a contrarian view, then now could be a good time to buy.

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Roland Head has no position in any shares mentioned. 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.