Is it crazy to invest in high street retailers when sales are increasingly moving online? I don’t think so. In my view, what matters is identifying the companies that will be able to make the shift online and remain profitable. Today, I want to look at two retailers that could be worth considering.
A class act
FTSE 100 firm Next (LSE: NXT) appears to be navigating the shift online with supreme skill and January’s trading update showed exactly how this is working.
Retail sales fell by 7% during the year to 29 December, but online sales rose by 14.9% over the same period. Overall, the group’s full-price sales rose by 2.6% during the year.
What these figures tell me is that Next’s customers are still buying. They’re simply shifting their purchases online. To make allowance for lower store sales, Next is closing physical units if it can’t negotiate lower rents on lease renewals.
A hidden attraction
This business also has another attraction that’s less obvious. A significant number of Next customers buy on credit. According to the firm’s interim results, credit customers owe the group about £1.1bn. Management expect this to generate a net profit of about £123m for the current year. That’s about 20% of this year’s forecast profits.
This finance income is one of the reasons why Next is one of the most profitable businesses in the UK retail sector, with an operating margin of about 19%.
Shares in this quality retailer are currently on sale with a 2019 forecast price/earnings ratio of 11 and a dividend yield of 3.4%. Although growth is expected to be limited over the next year, I think this is too cheap. I’d be a long-term buyer while the shares are under £50.
An upstart rival with strong growth
Next isn’t the only fashion retailer that’s profiting in stores and online. A smaller but more upmarket alternative is Joules (LSE: JOUL), which listed on the AIM market in 2016 and has a market-cap of £227m.
Half-year figures published on Wednesday show that sales rose by 17.6% to £113.1m during the six months to 25 November. Underlying pre-tax profit rose by 14.7% to £10.7m. Joules is also expanding overseas with international revenue rising 64.2% during the half year and now accounts for more than 15% of total sales.
One problem
The only problem I have with these figures is that this company doesn’t separate out online and retail (store) sales in its published accounts. This is unusual, as it makes it impossible for investors to understand how the group’s store network is performing.
We are told that internet sales now account for 46.5% of all retail sales, up from 35.8% at the same point last year. Despite this, the number of stores and concessions operated by the company has risen from 118 to 157 over the same period. What kind of contribution are these outlets making to sales and profit? We simply don’t know.
Should you buy Joules?
The firm says its stores are increasingly important for click & collect and online returns, as well as sales. I can see the strength of this argument, but I’d still like to see the cold hard numbers.
Although Joules is undoubtedly profitable and growing, I feel the shares are fully priced on a 2018/19 forecast P/E of 19. I won’t be investing just yet.
