At a time when a number of UK listed retailers are reporting disappointing results, today’s update from fashion brand Joules (LSE: JOUL) really stands out. The company is performing well and has been able to grow its top line by 16% in the first half of the current year. However, there are a lot more reasons to buy Joules for the long term.
As well as an increase in sales versus the same period of last year, the company’s margins have also expanded. Gross margins have increased by 100 basis points against last year’s comparator as a result of a higher proportion of full-price sales, better distribution facilities and a favourable product mix within wholesale.
In terms of its top line increase, Joules performed well in both a retail and wholesale capacity. Its increasing footprint, better performance from new and core ranges, as well as a growing customer base all positively impacted on its performance. Retail revenue also benefitted from the opening of 10 new stores alongside improved e-commerce performance. Meanwhile, wholesale was boosted by international expansion, the launch of kidswear in the US and the strong performance of the autumn/winter range.
Clearly, the UK retail sector has endured a turbulent 2016. Looking ahead, Joules and the rest of the fashion industry faces an uncertain future. Brexit is likely to cause higher inflation thanks to a weaker pound. This could lead to falling consumer spending as a result of inflation potentially being higher than wage growth over the coming years. In such a situation, it would be necessary for retailers to either reduce prices or else accept lower sales growth.
However, in the case of Joules it has an upbeat outlook and low valuation which provide it with a wide margin of safety. For example, in the current year it’s expected to report a rise in earnings of 23%, followed by additional growth of 16% next year. This puts it on a price-to-earnings growth (PEG) ratio of 1.2, which indicates that now is a good time to buy it.
A better option?
Of course, Joules is a growing brand which has potential. However, it lacks the same degree of customer loyalty a more established, lifestyle brand such as Burberry (LSE: BRBY) offers. Burberry may have endured a challenging period, but with a new management team and a sound strategy which continues to focus on emerging markets and technology over the long run, it has the potential to record improved performance.
For example, in the next two years it’s expected to record a rise in earnings of 14%. While it trades on a PEG ratio of 2.3, the lower risk profile it offers versus sector peers means that Burberry remains a sound long-term buy. Clearly, Joules has superior near-term growth prospects and is worth buying, but for the long term its sector peer could be the better option.
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Peter Stephens owns shares of Burberry. The Motley Fool UK has recommended Burberry. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.