With July recording the weakest total retail sales growth since 1995 at just 0.3%, retail is almost a no-go area right now in pre-Brexit Britain. But with many retailers’ shares tanking in recent years, it could prove a fruitful buying opportunity for investors willing to take a leap of faith. After all, Brexit cannot signify the demise of every single UK retailer forever. But if you prefer shares that have stayed strong, two that have caught my eye are Boohoo Group (LSE:BOO) and Next (LSE:NXT).
Growth through acquisitions
Boohoo yesterday acquired the online business of mid-market fashion labels Karen Millen and Coast for £18.2m. Both are well-known-but-distressed ‘occasionwear’ destinations. Boohoo already has a track record of successfully completing acquisitions that have added rapid growth to the business, both in the UK and internationally.
Its price-to-earnings ratio (P/E) is a very high 74, and it doesn’t offer a dividend, so at £2.39 a share, I can forgive you for thinking it’s too late to buy-in.
Yet the company continues to go from strength to strength. It has a reasonable debt ratio of 38% and posted a 39% rise in total sales for the three months to May, reaching £254.3m. Guidance for full-year revenue growth remains 25%-30%.
The company has decent cash reserves of £194m and it seems one reason for this is to have cash on hand to complete its target takeover bids. Earlier this year, CEO John Lyttle said: “We have ambitious plans for the group and continue to invest to ensure that our scalable multi-brand platform is well-positioned to disrupt, gain market share and capitalise on the global opportunity in front of us.“
Its impressive £2.7bn market cap makes it the fifth-largest on the FTSE AIM 100. Its determination to grow and confidence in selling online mean I think it’s still worth buying.
At the end of July, Next shares surged 10% on the back of positive trading results, causing management to increase profit guidance by 10% for the full year to £725m. The FTSE 100 company now expects earnings-per-share growth of 5.2% in 2019/20, rather than 3.4%.
Next is continuing its commitment to buying back shares and purchased £6.5m on August 5. Its current share price is £59 which still seems a bargain compared to the target of £67 thought achievable by some analysts.
One of the company’s biggest attractions for investors is its early advantage in e-commerce with its longstanding online business now around the same size as its retail stores business. Within the wider retail sector, in the next decade, the internet will account for 53% of sales, up from 20% today, according to a study by Retail Economics. This will not come as a surprise to many, but it hammers home the necessity for retailers to be digitally astute in their offerings and also how advanced Next is.
Its online sales were up 12% in the three months to July 27, compared with a forecast of 9.7%. It has also successfully branched into selling third-party ranges from brands including Adidas, Boohoo and Abercrombie & Fitch, making sales of more than £400m annually. Its P/E is a reasonable 13.5, and it has a dividend yield of 2.7%.
It is difficult to strike gold with the challenges facing the UK stock market today, but I think both Boohoo and Next seem capable of forging ahead in e-commerce and multi-label offerings and consider each a Buy.
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Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has recommended boohoo group. 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.