The Motley Fool

Is this the best retailer after today’s results?

Laura Ashley (LSE: ALY) has risen by 4% today after releasing upbeat full-year results. They provide clues to its future outlook and whether it’s a more appealing buy than sector peers Tesco (LSE: TSCO) and Sports Direct (LSE: SPD).

For example, Laura Ashley’s pre-tax profit increased from £22.9m in the prior year to £25.8m in the 2016 financial year. This was aided by an increase in like-for-like (LFL) retail sales, which grew by 4.1%. Laura Ashley experienced growth across all categories, which highlights the diversity of its improved performance. This performance was also helped by a change in year-end, which made the 2016 financial year a 74-week period, versus a 53-week period from last year, although the LFL figures are based on a full 74-week comparison.

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Online revenue was a major contributor to sales growth of around 33%. Online sales increased from £48.5m in the previous year to £73.5m in the 2016 financial year. This is likely to be a key catalyst for Laura Ashley’s future growth and the investment it has made in the digital space is proving to be highly worthwhile.

Laura Ashley has signed a new licence partner for Australia, which helps it to diversify its business. It’s also exploring expansion into new territories, which could further boost its profitability. This goes against the strategy employed by Tesco, which is in the process of selling off non-UK assets, while Sports Direct’s international expansion has been somewhat mixed.

Now for something completely different

In fact, Sports Direct is enduring a very difficult period at the present time. Its profitability has come under pressure due in part to challenges in international markets, while it faces political risk due to the alleged mistreatment of workers at its Shirebrook depot. This has caused its shares to trade on a low valuation, with Sports Direct having a price-to-earnings (P/E) ratio of only 11.2. This compares favourably to Tesco’s P/E ratio of 24.6, but is higher than Laura Ashley’s P/E ratio of 8.9.

Laura Ashley is forecast to grow its earnings by 19% in the current year, while Tesco is expected to report a rise in its bottom line of 38% in the next financial year. These growth rates put the two companies on price-to-earnings growth (PEG) ratios of 0.5, which indicate that their shares are undervalued. Sports Direct is due to report a fall in earnings of 25% this year, which means that its shares lack appeal in comparison.

Tesco is clearly in a recovery phase, but its new strategy is working well and resonates well with customers in terms of a simpler, more straightforward approach to pricing. Its decision to exit non-UK businesses may hurt its future performance due to the lack of growth forecast for the UK economy in 2017 (the Bank of England predicts the UK economy will grow by 0.8% next year), while Laura Ashley is becoming a more international business.

In this sense, Laura Ashley has greater appeal, but due to Tesco’s size, scale and financial strength, it remains a more enticing buy based on its risk/reward ratio.

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Peter Stephens owns shares of Tesco. 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.