The high street is a fairly uncertain place for stock market investors at the moment. But I think I’ve identified two companies with the potential to be long-term winners.
The first of these is high street and travel retailer WH Smith (LSE: SMWH). Shares in the firm dipped 5% this morning after a trading update revealed a 1% fall in like-for-like sales during the 20 weeks to 20 January. But this single figure masks two very different stories.
Like-for-like sales from the group’s Travel stores rose by 3% during the quarter, with new store openings lifting total sales by 7%. In contrast, sales from the group’s High Street division fell by 4% on a like-for-like basis, or by 5% in total.
Does travel need the high street?
The group’s Travel outlets are going from strength to strength. They now generate nearly two-thirds of total annual profit. WH Smith-branded outlets are also succeeding in overseas markets, where the brand isn’t such a well-known name.
The High Street stores don’t seem essential for branding purposes. And although they continue to generate cash and profits for the group, this side of the business is probably a drag on the group’s overall growth rate.
On its own, I’d expect the Travel business to attract a higher valuation multiple than the combined group. So it seems to me that chief executive Stephen Clarke will eventually come under pressure to find a way of exiting the declining part of the business.
This potential, plus the firm’s strong financial situation, suggest to me that despite a forward P/E of 18, WH Smith shares are still worth considering.
My top retail buy
The one big surprise was news of a new chief executive, Alex Baldock, who will replace Sebastian James in April.
Mr Baldock’s background is interesting. He’s currently chief executive of the UK’s second-largest pureplay online retailer, Shop Direct. This group used to run catalogue store Littlewoods, but now runs the successful Very.co.uk business.
However, one of Mr Baldock’s previous senior roles involved working in asset finance. This suggests to me that Dixons Carphone’s newish Your Plan credit account business could become an important element of future growth. Customer account numbers have already reached 500,000, with more than £1.6bn of credit approved.
I suspect these numbers could grow rapidly. An increasing number of smartphone users are choosing to buy SIM-free phones and pay for a SIM-only contract. So providing payment plans for smartphones could be a profitable business that would replace declining mobile contract sales.
I’m a happy holder
With so many purchases moving online, Dixons Carphone’s large store network could become a liability. But the group has a very high market share and I suspect stores will remain relevant in this sector, even if store numbers fall.
In the meantime, the shares look temptingly cheap to me, on eight times forward earnings and with a 5.3% dividend yield. I hold the stock and continue to rate it a buy.
Roland Head owns shares of Dixons Carphone. 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 us better investors.