The UK retail sector has experienced a hugely challenging period over the last year. Consumer confidence has declined, with Brexit contributing to an increasing sense of unease about the UK’s economic prospects.
Higher inflation has also squeezed consumer spending, but the picture could be changing on that front. Wage growth is now higher than inflation and this could prompt an improvement in trading conditions for retail shares.
With that in mind, here are two retail stocks that seem to offer wide margins of safety. While risky, they could prove to be exceptionally cheap at the present time.
Reporting on Friday was womenswear value retailer Bonmarche (LSE: BON). The company’s trading update for the year to 31 March showed that it continued to experience difficult trading conditions, but that it was able to deliver profit before tax, in line with its expectations.
Total sales for the year declined by 0.5%, with like-for-like (LFL) sales falling by 1.5%. However, the performance of its online operations was strong, with LFL sales growth of 34.5% recorded for the full year. Store LFL sales declined by 4.5%, which partly reflects the wider challenges faced by clothing market operators who trade through physical stores.
Looking ahead, Bonmarche is forecast to return to strong growth over the next two financial years. Its bottom line is due to rise by 21% in the current financial year, followed by further growth of 14% next year. These figures suggest that investor sentiment has the potential to increase – especially since the stock trades on a price-to-earnings growth (PEG) ratio of just 0.4.
While potentially volatile and having an uncertain future, the company’s shares may offer high rewards. For less risk-averse investors, they could be worth buying for the long run.
Also reporting this week was department store Debenhams (LSE: DEB). It experienced further challenges across its business, with sales and profitability coming under severe pressure. Although poor weather conditions were at least partly to blame since they caused the temporary closure of around 100 of the company’s stores, the underlying performance of the business has remained disappointing.
Further challenges are expected to take place in the coming year as the business seeks to accelerate the implementation of its ‘social shopping’ strategy. The market is forecasting a fall in earnings of 42%, which could cause a drop in the company’s share price after its decline of 57% in the last year.
However, investors appear to have priced in the challenges facing the stock. Debenhams has a forward price-to-earnings (P/E) ratio of around 7, which suggests that it offers a wide margin of safety. With the company expected to return to positive earnings growth of 3% in the next financial year and set to enjoy a potential tailwind from falling inflation, now could be a good time to buy. While it may be a relatively risky stock, its reward potential seems to be high.
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Peter Stephens owns shares of Debenhams. 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.