2 growth stocks defying the struggling high street

These two stocks are delivering growth in a generally unloved sector. Time to buy?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It’s said by some that traditional high street retail is heading into a long and perhaps terminal decline. Bricks-and-mortar chains have inherent cost disadvantages versus online-only specialists. The latter are growing fast, with consumers voting not so much with their feet as with a tap of their finger on digital devices. And already-struggling high street retailers now face the added headwind of consumer belt-tightening as inflation rises and wages stagnate.

I agree, to a large extent, with the view that traditional retail is in the early stages of structural decline. However, some high street names are continuing to deliver resilient growth and present an interesting investment proposition in what has become a largely unloved sector.

In line with expectations

WH Smith (LSE: SMWH) is one such proposition. Shares of the long-established retail chain are modestly higher today after it released a pre-close trading statement for its financial year ending 31 August.

The board confirmed that the outcome for the year is set to be as expected by the market. It said: “Our Travel business continues to deliver a strong performance … Our High Street business continues to perform in line.”

Successful two-track strategy

To be clear, WH Smith’s high street division is struggling for top-line growth. In its half-year results, revenue was 4% lower on the prior-year period. However, the business is well managed and the division’s H1 trading profit was maintained despite the lower revenue.

The Travel arm is the company’s growth engine. H1 revenue was up 10% and trading profit increased 11%. Management said today that the division’s current-year programme of new store openings both in the UK and internationally has progressed in line with plan. And it added: “We continue to see further opportunities in the international news, books and convenience travel market.”

WH Smith’s successful focus on profitable growth and cash generation is enabling it to not only invest in the business, but also deliver shareholder value in the form of share buy-backs and healthy dividends. At a share price of 1,857p, the 12-month forward P/E is about 17 and the prospective dividend yield is 2.8%. I’d rate this resilient business a ‘hold’ at current levels.

Great hand of cards

No-frills greeting cards chain Card Factory (LSE: CARD) is positively thriving on the high street. Its 12-month forward P/E is a tad lower at 16 than WH Smith’s but with analysts forecasting a continuation of special dividends, in line with the board’s policy of returning surplus cash to shareholders, the prospective yield of 7.5% is significantly higher. The valuation and the company’s growth prospects led me to rate the shares a ‘buy’.

In a trading update earlier this month, Card Factory reported sales growth of 6.7% for the six months ended 31 July (on the basis of an equivalent number of trading days in the prior-year period). This represents acceleration on the last full-year growth rate of 4.3%.

The company’s total UK estate is up to 895 stores, with new openings running at 50 a year. A first trial store in the Republic of Ireland and a small number of others in the pipeline also bodes well for future growth. As the leader in a large and resilient market and with a vertically integrated business model, Card Factory has excellent margins and is a company I very much like.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended WH Smith. 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

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »