Make no mistake. The market is sceptical about companies with large portfolios of retail outlets. But while growth may have slowed on the high street, sales haven’t collapsed.
By contrast, the shares of major high street brands have been battered over the last year. Today I’m going to look at two well-known companies where I believe this sell-off may have gone too far.
There’s money in sin
Shares of bookmaker William Hill (LSE: WMH) have fallen by 33% over the last year. But they edged higher on Friday morning after the group published its 2016 results.
The figures were in line with the firm’s reduced guidance from January. Net revenue rose by 1% to £1,603.8m, but adjusted earnings per share fell by 10% to 22.3p. The bookie’s dividend was left unchanged at 12.5p per share.
These figures give William Hill stock a P/E of 12 and a dividend yield of 4.7%. Cash generation is also attractive, with the group trading on 12 times trailing free cash flow, excluding acquisitions.
My main concern is that net debt rose by 30% to £618m last year. Although William Hill spent £104m on acquiring an additional stake in its technology provider, the group’s net debt is now almost four times after-tax profits. I wouldn’t want to see a repeat of last year’s £95m share buyback, unless borrowing levels fall.
The odds look good
William Hill hasn’t yet announced a replacement for ex-chief executive James Henderson, who was given the boot last July. Interim chief Phillip Bowcock is said to be the favourite, but lacks gambling industry experience.
There’s a risk that an outside hire will identify fresh problems and cause an upset, but as things stand I think the outlook is positive for William Hill. Consensus forecasts suggest earnings will rise by 10% to 24.5p per share this year, while the dividend is expected to rise to 13p. This gives the stock a 2017 forecast P/E of 10.8 and a prospective yield of 5%. This could be a good entry point.
I might choose this option
However, gambling stocks have regulatory risks at the moment relating to in-store gaming machines. William Hill’s net debt is also higher than I’d like to see.
One company that doesn’t have to face either of these risks is pet superstore chain Pets at Home Group (LSE: PETS). The firm’s share price has fallen by 23% this year after management admitted that like-for-like sales growth had slowed in Q3.
I think this may be missing the point. Growth is being driven by the expansion of its in-store vet and grooming services, alongside retail sales. Revenue from services rose by 7% during the third quarter.
Online sales are also rising strongly. You’d expect pet owners to buy more of their supplies online these days, but grooming and vet services will always require a store visit. Pets at Home’s goal is to build customer loyalty and increase sales by developing a seamless offering which combines online, in-store and essential pet care services.
The group currently has very little debt and generates high levels of free cash flow. The shares trade on 12 times forecast earnings, with a forecast yield of 4.4%. I believe this group could prove to be a good buy at current levels.
