This month, I’m looking at UK shares with resilient business models, entrepreneurial management, and quality characteristics. Despite a dramatic decline in footfall in British towns, some retailers still managed to grow their business.
One such company is Cake Box Holdings (LSE: CBOX). It’s a specialist retailer of fresh cream cakes and it’s growing. Despite government restrictions, it reported a year of strong growth. It experienced a strong recovery in trading once its shops were allowed to reopen following the first UK lockdown last year.
Cake Box is a franchise business that earns much of its income from new shop openings. There were 24 store openings during the year, taking the total number of stores to 157. It’s also encouraging to see a strong pipeline of upcoming openings. The company is currently holding deposits for 52 sites across the country.
The company continues to innovate with new product offerings and delivery options. It also launched an own-brand delivery platform, which helped to deliver year-on-year online sales growth of 84%.
Quality UK shares
Cake Box has many impressive characteristics that I like to see in quality UK shares. It offers a return on capital of over 30%, and an operating margin of over 20%. With double-digit earnings growth, and an undemanding price-to-earnings (P/E) ratio, I reckon these UK shares are cheap. Its balance sheet also looks strong and net cash is up 70% on the prior year.
I like that the company is entrepreneurial and founder-led. Both the CEO and CFO hold significant shareholdings in the company. They have skin-in-the-game and it shows in how they’ve managed to grow the business from one store in 2008, in my opinion.
One downside is that the significant shareholding by the founder can make the shares relatively illiquid. This can make larger purchases and sales more difficult. Another potential risk is whether Cake Box can continue to find more suitable locations without cannibalising sales from other stores.
Since I last considered shares in Cake Box in February, the share price is up 24%. It gained 135% over the past year, but despite the triple-digit performance, I’m still considering them.
Another resilient retail business that not only survived but managed to grow during the pandemic is B&M European Value Retail (LSE:BME).
Better known as B&M, this leading variety goods value retailer reported strong revenues and margins in its third quarter. Like Cake Box, B&M is also opening new stores. It opened 18 new UK stores in Q3. In its trading update for Q4, I was pleased to see that B&M guided to increasing earnings and a continuation of strong margins. Also like Cake Box, B&M management are entrepreneurial and hold a significant shareholding in the company.
Despite a positive update, the company warned about significant forecasting challenges due to the impacts of Covid-19. This could create some uncertainties for investors for the rest of the year. In addition, retail is highly competitive with relatively low barriers to entry. To thrive as an investment, B&M will need to continue growing and remain competitive.
I like B&M’s quality metrics. It offers a return on capital of 19%, and double-digit operating margins. It also offers a dividend yield of nearly 4%. Overall, I’d consider these quality UK shares for my Stocks and Shares ISA.
Harshil Patel has no position in any of the shares mentioned. The Motley Fool UK has recommended B&M European Value. 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.