2 bargain growth and income stocks that could help you retire early

Brick-and-mortar clothing retailers may not be the hottest type of stocks around these days but the 6.7% dividend yield, double-digit earnings growth in four of the last five years and increasingly attractive valuation of men’s clothing retailer Moss Bros  (LSE: MOSB) have certainly caught my eye.

And even as competitors have wilted in the face of recent industry-wide headwinds, Moss Bros continues to perform very well. In the half year to July, total revenue was up 4.3% to £66.6m as the company opened up four new stores to take its total to 129 and increased like-for-like (LFL) sales by 2.8%.

Management is growing same-store sales by making its retail outlets more appealing through refurbishments, focusing on developing a stronger marketing identity than its previous reputation as just a suit hire shop, and expanding its e-commerce reach. Thus far these changes are paying off, with sales up and operating profits increasing a full 16.6% year-on-year in H1 to £4.2m even as the weak pound led to higher input costs.

With cash balances of £21.5m in the bank at period end and reducing capex requirements as its store refit programme nears conclusion, management was able to return the majority of earnings directly to shareholders via a £4m interim dividend of 2.03p per share.

After more than doubling earnings in the last five years, the company’s shares now trade at only 16.4 times forward earnings. I reckon investors who aren’t put off by the sector’s low barriers to entry or cyclical nature could find Moss Bros’ income and growth potential a boon to their retirement portfolio. 

One for the contrarians 

A riskier option I have my eye on is UP Global Sourcing (LSE: UPGS), which currently offers a 5.4% dividend yield and trades at 11 times forward earnings. The company designs, markets and imports a range of consumer goods such as pots and pans, irons and vacuum cleaners from factories in Asia and sells them to retailers such as B&M, Tesco, Amazon, and Argos among many others.

The company’s sales have taken off in recent years, and were up 39% in the year to July, but its share price more than halved in early September after management warned that poor consumer confidence and the weak pound was causing customers to delay orders and that it expected no sales growth in 2018. That said, full-year results released this morning show the company is in a decent place to withstand the situation as its net debt is just £6m, or 0.5 times EBITDA.

While customers not committing to orders far in advance, as they were doing, is a worry, it’s not the end of the world if it’s only a short-term problem and consumer spending proves more resilient than expected. Furthermore, UPGS should remain solidly profitable even if margins move downward next year.

Indeed, analysts are expecting a 30% drop in earnings per share next year but still forecast some 7.6p in EPS that would safely cover current full-year dividends of 5.115p per share and keep the company’s balance sheet in impressive health. Investing in a company that just warned it expects no sales growth next year takes a more risk-hungry investor than myself, but if the economy is on sounder footing than retailers expect, now could be a chance to pick up fast-growing, high-income UPGS at a relatively bargain price. 

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Ian Pierce has no position in any of the shares mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon. 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.