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.
A top growth stock
Could there be a better growth prospect than WH Smith and Card Factor? I urge you to read the compelling analysis of a terrific growth stock from the experts at the Motley Fool.
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