2 top retail stocks I’d buy and hold for 10 years

Image: Next: Fair use

Retail is increasingly moving online. Read just about any retailer’s results and you’ll find its online segment growing markedly faster than store sales. In fact, there are plenty of examples of physical store sales — particularly like-for-like sales — declining.

It seems clear that this is a long-term structural trend. Online specialist Asos (LSE: ASC) has been ahead of the game, having been founded 17 years ago. And in its latest results, announced today, chief executive Nick Beighton said: “Asos is making good progress towards its ultimate goal of becoming the world’s no. 1 destination for fashion-loving 20-somethings”.

I’m expecting it to be a sparkling success over the next 10 years. And I believe its prospects over this timescale justify the stock’s premium rating.

The profit tap

Today’s results for the half year ended 28 February saw revenue rise 37% (31% at constant exchange rates) to £911m, with pre-tax profit of £27.3m, a little ahead of a City consensus forecast £27.1m.

The company said it expects full-year pre-tax profit to be “broadly in line” with consensus expectations. The market tends to interpret ‘broadly’ as ‘a tad below’ and the shares fell as much as 7.4% in the first hour of trading. They’ve since recovered somewhat to 5,775p (down 3.4%), as I’m writing.

I calculate full-year earnings conservatively at 77p a share, which gives a price-to-earnings (P/E) ratio of 75. Of course, this is sky high. However, we need to appreciate that at this stage Asos is effectively reinvesting most of its profit back into the business to drive tremendous customer and revenue growth.

I believe it is pursuing the correct strategy, which will maximise shareholder value over the long term. I’m happy to see the company sacrifice profits for 20%-25% top-line growth in the medium term and I reckon that when management ‘turns on the profit tap’ further down the line, the shares will be trading a good deal higher than today’s level. For this reason, I’d be happy to buy and hold the stock for 10 years.

All bases covered

Next (LSE: NXT) has gone seriously out of fashion with investors. Its shares have almost halved in value from 18 months ago. A challenging trading environment and profit warnings over the period have taken their toll on sentiment. And this has been further dampened by concerns about Brexit-related issues, such as price inflation due to sterling’s devaluation.

In its latest annual results, released last month, it reported a 2.9% fall in store sales (Next Retail) but a 4.2% rise in online sales (represented by Next Directory). The company said: “We remain extremely cautious about the outlook for the year ahead”.

This may not sound too promising, but at a share price of 4,155p, the forward P/E is just 10.3. Furthermore, it is such a prodigious generator of cash that even in this year’s challenging environment, management  anticipates paying an ordinary dividend of 158p and special dividends of 180p, giving a total yield of 8.1%.

Looking beyond the current year, I’d be happy to buy and hold it for 10 years for two main reasons. First, its online business is successful and increasingly significant. Second, management reckons that in an unlikely worst-case scenario of high like-for-like store sales declines for the next 10 years, the stores portfolio could be “managed down profitably”. Thus, Next seems to have all bases covered.

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G A Chester has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.