Is McColl’s Retail Group plc a better buy than Tesco plc following today’s news?

Shares in convenience store giant McColl’s Retail Group (LSE: MCLS) spiked to three-week highs in Thursday business following the release of its latest trading statement.

McColl’s saw total sales edge 1.8% higher during the 13 weeks to 28 August, a result driven by its ambitious investment strategy. Chief executive Jonathan Miller confirmed that results for the fiscal year remain in line with the board’s expectations. He added: “We remain focused on the key elements of our clear strategy: to increase market share, grow our convenience product range and deliver great customer service, which we are confident will cement our position as a leading neighbourhood retailer.”

McColl’s is on track to reach the 1,000-store landmark by the end of the calendar year, the firm noted — it currently has 953 convenience outlets in operation following the acquisition of 36 stores in the last quarter.

McColl’s announced the purchase of 298 stores from The Co-operative Group in July for £117m, a deal the firm has described as “transformational” and which is expected to complete in 2017.

Underlying problems

But a fall in like-for-like sales suggested that all is not peachy over at McColl’s. The retailer saw takings at existing stores dip 2% in the year-to-date, with sales in its newsagents and standard convenience stores diving 3.7% in the period.

McColl’s isn’t immune to the huge competitive pressures battering the grocery sector, a phenomenon that is affecting small and large operators alike.

FTSE 100 colossus Tesco (LSE: TSCO) has been fighting a losing battle for years thanks to the rapid emergence of cut-price chains Aldi and Lidl. The Cheshunt business saw total sales dip again during the three months to 16 August, according to Kantar Worldpanel, this time by 0.4%.

And the price wars are likely to get ever-more-bloody in the weeks and months ahead should Britain lurches into recession, as many have predicted, and household incomes come under intensified attack.

Besides, the ongoing expansion of its rivals — from the aforementioned German chains to upmarket operators like Marks & Spencer — both online and on terra firma is likely to keep earnings at Tesco on the back foot.

So which should you buy?

These problems make Tesco a risk too far for canny stock selectors, in my opinion, particularly given its huge P/E rating of 26.6 times for the period to February 2016. This is at serious odds with the established benchmark of 10 times for stocks with patchy earnings outlooks, and leaves the business in danger of a huge share price retracement.

By comparison, McColl’s deals on a far more delectable P/E ratio of 10.8 times for the year to November 2016. And an estimated 10.2p per share dividend yields a fantastic 6.1%.

While both firms carry their share of risk, I reckon McColl’s is the superior stock for those seeking exposure to the British grocery segment.

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Royston Wild 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.