One super growth stock I’d buy before J Sainsbury plc

A combination of falling real wage growth and rising fears over the domestic economy continues to exert crushing pressure across the UK retail sector.

Britain’s established grocers like J Sainsbury (LSE: SBRY) have long been under the cosh however, stretching back the days of the 2008/09 recession when economic pressure then forced customers into the arms of the discount chains.

And with customers realising they can now get more for less, the likes of Sainsbury’s have found themselves scrambling to stop their customer bases eroding.

But value isn’t the only retail trend to emerge in the past few years, of course. Indeed, the exploding e-commerce phenomenon has also shaken up the high street, and can offer plenty of opportunity for canny investors. And in this regard I reckon fashion retailer Boohoo.Com (LSE: BOO) has what it takes to generate stunning returns.

Recovery still shelved

The struggles facing Sainsbury’s were underlined by today’s full-year financial release, the country’s second-largest supermarket advising that like-for-like sales (excluding fuel) fell again during the period to March 2017, this time by 0.6%.

As a consequence pre-tax profits at the London firm fell 8.2% year-on-year, to £503m.

And alarmingly Mike Coupe warned that “the market remains competitive and the impact of cost price pressures remains uncertain.”

One bright spot for Sainsbury’s however, was the resolute performance of its recently-acquired Argos catalogue business. Total sales here rose 4.1% year-on-year, while like-for-like sales at outlets in Sainsbury’s supermarkets soared between 20% and 30%.

So it comes as no surprise that Sainsbury’s plans to accelerate the introduction of 250 Argos Digital outlets into its supermarkets to March 2019, up from 59 at present.

But the success of Argos cannot hide the escalating problems Sainsbury’s faces at its core operations (the Argos arm accounts for just 13% of profits, after all). Indeed, rampant expansion by the likes of Aldi and Lidl, combined with the cost pressures created by the falling pound, look set to keep profits on the back foot.

So the City expects Sainsbury’s to print a fourth successive earnings decline in fiscal 2018, a 5% drop currently being expected. And given that this bottom-line stress looks likely to last long into the future, I reckon the grocer’s forward P/E ratio of 14.3 times is far, far too expensive.

In fashion

Those looking to get in on Britain’s retail sector would be better served by investing in Boohoo.Com, in my opinion.

While the company’s elevated valuation may put off some share pickers (Boohoo sports a forward P/E ratio of 69.1 times right now), I reckon this is fair value given the online giant’s exceptional growth outlook. Indeed, it is expected to generate growth of 25% in the year to February 2018 alone.

The company saw pre-tax profit climb 97% during fiscal 2017, it announced last week, to £30.9m, as rampant sales growth abroad drove revenues 51% higher to £294.6m.

Boohoo saw the number of active customers on its books rise 29% last year to a staggering 5.2m, and improvements to its digital platforms across the globe, as well as huge investment in its warehousing facilities, promise to keep sales streaming in across the group. I reckon the business is one of Britain’s hottest retail picks at the moment.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended 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.