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Can this recovery stock beat the Next share price in 2019?

With the trading difficulties at Debenhams still in the news, I suspect few would be surprised by Thursday’s report from French Connection Group (LSE: FCCN) that first-half revenues were down 2.4%. 

Wholesale revenues rose by 6.2%, but store closures plus “tough retail trading in the UK” hit the bottom line — and like-for-like sales in the UK and Europe dropped by 7%. That latter figure is probably worse than many feared, and is likely to be part of the reason for a 7% share price fall in early trading.

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French Connection also posted an underlying pre-tax loss of £5.5m, which is £0.4m better than the same period last year, though still not good.

But it’s not all bad, as the sale of Toast helped boost cash levels to £12.8m (from £6.7m a year previously). And the company reckons it “remains on track to return to profitability at the year end,” with chairman and chief executive Stephen Marks lauding “the changes we have made around the business over the last couple of years.”

Bargain?

If profit does return in the second half, it’s likely to be by only a small margin, which means forward fundamental ratios will be largely useless. So how should we decide whether to buy? It’s got to be a very subjective decision, but the fact that the share price has been holding up reasonably well over the past year makes me feel there could be a fair bit of confidence among investors.

Small-cap shares in troubled sectors are not my cup of tea due to the risk, but a full-year turnaround could be the platform for a positive 2019 for French Connection.

Sector expert

I’m again drawn to the company I see as one of the best in the business, the much larger Next (LSE: NXT). Despite the retail crunch, Next’s earnings per share have remained remarkably robust, having dipped by only 6% over the past two years, while the rest of the high street has been struggling. And the share price has held up well, too.

Even in 2018 when competitors are seriously under pressure, the City is expecting Next to put in a flat year for earnings — and is even predicting a return to EPS growth starting in 2019.

The firm’s most recent trading update reinforced that optimism and underlined the reason for it. Next’s full-price sales totals rose by 4.5% in the first half of the year, even though high street retail sales dropped by 5.3%. Online sales more than made up for that with a 15.5% rise.

Good balance

At the moment I think Next has probably got the sales mix just about right. Online selling really is the future of retail, but maintaining a healthy-looking high street presence is surely still important for keeping a brand alive and in the minds of shoppers.

I also like Next’s policy of returning cash to shareholders, with well-covered ordinary dividends yielding around 3%. On top of that, Next is such a good generator of cash that it paid a big special dividend last year and has been buying up its own shares.

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Alan Oscroft has no position in any of the shares mentioned. 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.

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