Retail stocks: what to watch in 2017

I’m convinced rising pressure on shoppers’ wallets should drive footfall at budget operators Card Factory (LSE: CARD) and B&M European Retail (LSE: BME) steadily higher in 2017 and beyond.

Value is likely to be one of the biggest games in town as galloping inflation pushes customers into the arms of those offering more for less. The CPI gauge surged to 1.2% in November thanks to sterling’s steady slide, and is predicted to have risen to fresh multi-year highs again last month.

Britons’ increasing appetite for picking up a bargain helped drive like-for-like sales at B&M up 7.2% in the three months to Christmas Eve, the company reported earlier this month. And the tills are likely to keep lighting up as the firm, like Card Factory, continues to expand its store network.

But I don’t think these qualities are fully appreciated by the market at present.

The greetings giant is expected to endure a marginal earnings drop in the year to January 2017 before recovering in 2018 with a 3% advance. These figures create P/E ratios of 13.1 times and 12.7 times, while Card Factory’s 3.8% dividend yield through to the close of fiscal 2018 also trumps the forward average of Britain’s blue chips.

Projected earnings rises of 13% for the period to March 2017, and 10% in fiscal 2018, mean B&M deals on more weighty P/E ratios of 20.7 times and 18.8 times for these years. But I believe the retailer’s soaring growth trajectory fully warrants these heady premiums.

In fashion

Undoubtedly clothing giant Next’s festive trading statement would have caused shivers across the entire retail sector. As well as advising of further revenues slippage in the run-up to Christmas, the retailer warned that “we expect the cyclical slowdown in spending on clothing and footwear to continue into next year.”

With competition rising, inflation on the charge and rising economic uncertainty also set to crimp shopper appetite, the outlook is becoming increasingly murky for Britain’s clothes sellers.

Having said that, I believe N Brown Group (LSE: BWNG) has what it takes to navigate the worst of these pressures.

Not only is the company’s clothing cheaper than many of its rivals, but its niche brands like plus-size Jacamo and Simply Be should help protect it from the sort of sales falls endured by its more generic rivals. Indeed, sales at these so-called Power Brands leapt 14.7% during the half-year to August.

Reflecting the mounting troubles facing Britain’s retailers, the City expects N Brown to endure a 5% earnings fall in the period to February 2017. But the bottom line is expected to stabilise in fiscal 2018.

And these projections result in mega-cheap P/E ratios of 9.2 times, suggesting that the near risks facing N Brown are baked in at current prices. Furthermore, when you factor in a colossal dividend yield of 6.8% through to the close of next year, I reckon the clothing giant could prove a splendid pick for patient investors.

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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.