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One retail turnaround stock I’d sell and one I’d buy

Furnishings-to-fashion retailer Laura Ashley Holdings (LSE: ALY) has lost its floral fragrance, its shares wilting since peaking at 35p in June 2015. Today they trade at just 8.6p, amid further bad news this morning.

Flower down

Laura Ashley has given advance warning of bad news in its full-year results, to be published on 23 August. These will show an exceptional £2.8m impairment charge due to the revaluation of a freehold property owned by the group. Management has previously warned that trading conditions are “demanding“, and the board now expects net pre-tax profits to be materially below market expectations. The fact that its share price is down just 4.44% as a result suggests to me that markets weren’t expecting much of the firm anyway.

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This is its second recent profit warning. In February, the £62.59m business reported a drop in pre-tax profit from £11m to £7.8m for the 26 weeks to 31 December, amid continued market challenges. Chairman Tan Sri Dr Khoo Kay Peng blamed a failure to meet sales and margin targets and to maintain or increase market share, amid “well-documented pressures in the broader commercial environment”.

Brexit bites

Those pressures haven’t eased, nor have Laura Ashley’s problems as wages are squeezed and Brexit uncertainty erodes consumer sentiment. Even a “great British brand” (albeit one owned by a Malaysian group) cannot escape the fallout. Management is embracing modernity, using the web to attract a larger international audience. British tradition still sells in parts of the world (often better than in Britain itself).

The numbers suggest a business in deep trouble, with a valuation of just 4.89 times earnings, and a dividend yield of an almighty 19.6%, covered just once. The market expects revenues to fall from £400m in 2016 to £286.6m in 2017, with earnings per share (EPS) down 35%. Thereafter we may see some stability, with EPS expected to rebound 17% in 2018. Some might consider this an exciting buying opportunity but I suggest you chuck out the chintz.

Sofa, so bad

Laura Ashley isn’t the only furnishings retailer in trouble right now. DFS Furniture (LSE: DFS) issued a profit warning in mid-June, after previously warning of a softer market environment, with significant declines in store footfall hitting customer orders.

Falling demand is a sector problem, just ask Laura Ashley. DFS expects these problems to be short-term but in these uncertain times, who knows? Last week’s post-close trading update inflicted further damage, with second half revenues down 4% year-on-year, following an increase of 7% in the first half. However, falling revenues will be partly offset by cost-cutting and operating efficiency initiatives.

Joules to the rescue

EPS are expected to fall 16% this year, but 6% rebound in 2017. The forecast yield is 5.6%, with reasonable cover of 1.7. Management is forward-looking, opening new stores under the DFS brand and seeking to purchase complementary business Sofology, which boasts a strong technology-led omnichannel proposition.

The £459m company has also announced a new exclusive partnership with booming upmarket lifestyle brand Joules. Its current valuation of 4.59 times earnings tells you that investing in DFS will not be a comfortable experience, but could ultimately prove rewarding. Not one for couch potatoes though.

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Harvey Jones 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.

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