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Should you buy Debenhams plc & Booker Group plc after 5% sales growth?

This morning’s 4% rise for Debenhams (LSE: DEB) makes it one of this week’s top retail performers. The department store group said that like-for-like sales rose by 5% over the Christmas period and by 3.5% over the eighteen weeks to 7 January.

Online sales rose by 13.9% during the same eighteen-week period, raising two-year online sales growth to more than 25%.

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Still facing challenges

It’s a solid performance for a company that’s been struggling to deliver growth in recent years. The company’s plan to shift its sales mix away from clothing and towards beauty products appears to be helping to boost revenue.

However, today’s figures suggest to me that Sergio Bucher, Debenhams’ ex-Amazon chief executive, does still face some challenges. When currency gains are excluded, UK like-for-like sales only rose by 1% during the period. If we exclude online sales from this total, today’s figures suggest to me that in-store sales may still be falling.

Beauty and gift sales now account for 57% of the group’s total sales. But this shift in focus comes with slightly lower profit margins, which means that the group’s gross margins are expected to be flat again this year.

Cheap enough to buy?

Despite these concerns, today’s figures suggest to me that Mr Bucher is making progress at Debenhams. As a former Amazon executive, you’d expect him to improve the group’s online offering. But he’s also overseeing a shift in the stores’ focus towards dining, beauty and gift shopping — areas in which stores can offer a better service than online retailers.

The outlook remains uncertain, but I believe that with the shares trading on 8 times 2016/17 forecast earnings and offering a tasty 6.3% yield, most of the risk is already reflected in Debenhams’ share price. The shares could offer decent upside potential from here.

A genuine growth buy?

Shares of wholesaler Booker Group (LSE: BOK) edged higher this morning, after the firm said that like-for-like sales rose by 3.2% during the third quarter.

The share price didn’t move far, however. At the time of writing, Booker stock is up by less than 1%. One reason for this is that Booker is already priced for growth, on a 2016/17 forecast P/E of 22.8.

A mixture of acquisitions and organic growth has doubled the group’s after-tax profits since 2012. The market may now be pausing for breath to see if this momentum continues.

Serious quality

Valuation aside, there’s a lot to like about Booker. Earnings per share have risen by an average of nearly 14% per year since 2011, during which time the group’s operating margin has risen from 2.1% to 3.0%.

Free cash flow has been consistently strong. This has enabled management to increase the dividend by an average of 22% per year over the last six years, while also maintaining a net cash balance and making acquisitions.

Probably the best indicator of the quality of this business is that return on capital employed has risen from 18% to 25% since 2011. Those are extremely high figures and show that as Booker grows, it is becoming more profitable.

Booker’s high returns means that I rate the stock as a strong hold and a potential buy, even at current levels.

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Roland Head has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended The Motley Fool UK has recommended Booker. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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