While traditional high street retailers are under intense pressure from seemingly every corner, discounters continue to gain market share with bargain-hungry consumers. That’s why two of the shares at the top of my watch list are discounter retailers Card Factory (LSE: CARD) and B&M (LSE: BME).
A pleasant surprise in the letterbox
Card Factory is at the top of my list because the purveyor of discount greeting cards is growing quickly, offers a very nice dividend yield, and is trading at a very attractive price point.
The company’s growth is coming from two directions. First, its range of high quality, low price cards is taking market share from mid and high-end competitors alike. This is clear in the fact that like-for-like (LFL) sales from existing outlets have grown for six years running with a target range of 1%-3% per annum.
The second front is opening stores across the country. At the end of April the company traded from 876 stores and is expecting to add around 40 more during the rest of the year in the UK as well as opening trial stores in Ireland. The 11 new stores opened during Q1 together with higher LFL sales increased revenue by 6.1% year-on-year (y/y).
With a medium-term target of 1,200 stores, there’s still plenty of room for the company’s top line to continue growing. And with operating margins a very impressive 21.5% last year, profits are also increasing at a very solid clip.
High margins, impressive cash generation and a very low net debt are all doing their part to make Card Factory a great income stock as well as a growth share. Last year the company paid out a 9.1p ordinary dividend and a 15p special dividend thanks to surplus levels of cash. Together these payouts equate to an 8% yield and management is confident of another special payout this year.
With its shares trading at just 15 times forward earnings while offering growth, great margins and a bumper dividend, I reckon Card Factory is a stellar retail stock to own for the long term.
The offline everything store
It’s a similar story of sales increases through LFL growth and new stores for general merchandise retailer B&M. In the year to March, the company posted a whopping 19.4% y/y revenue increase thanks to 3.1% LFL growth in the UK and the opening of 53 stores here in the UK and 19 in Germany.
Same-store sales growth really took off in H2 with a 5.4% LFL sales rise contributing to management upping its medium-term store target from 850 to 950 stores in the UK. With just 537 stores at the end of March, this represents plenty of potential growth for the Midlands-centric company.
By sourcing its products directly from factories in China, B&M also has industry-beating EBITDA margins that hit 9.7% last year. This gives the company plenty of wiggle room to actually grow market share in this period of rising inflation since it can profitably undercut fellow discounters as well as traditional retailers.
With debt falling as the company moves on from its private equity-led IPO and huge growth potential in the UK and Germany, I see B&M as a great stock to pick up if its shares pull back from their current valuation of 19.7 times forward earnings.
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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.