I’m a natural born cheapskate.
So when it comes to investing, I always look for cheap shares in the hope of bagging a mega-bargain.
But even when out shopping, my miserly ways naturally push me towards the pound shops in order to save a few bob.
You see, I just like to look after the pennies.
And you only have to walk down your local high street to see that I am not alone.
This retail sector is expected to expand at 9% a year
These days the high streets are full of discount chains and 99p stores that never seem empty.
Certainly, the recession has changed where people shop, and I can’t really see the growing trend for discount shopping changing any time soon.
Indeed, statistics within the flotation prospectus for Poundland (LSE: PLND) claimed the ‘value general merchandise retail market’ had grown at a 15% average annual rate since 2007…
…and could advance by a further 9% a year until 2017.
Interestingly, Poundland’s admission document also claimed:
“While the value general merchandise market has primarily been targeted towards less affluent consumers, there is an increasing penetration in the more affluent customer base.
While many new consumers entered the value retail market during difficult economic times, research suggests that the majority of these consumers have indicated they will continue to use value retailers even as the economy improves and they have higher disposable income.“
Well, you can count on me using value retailers even as the economy improves!
Poundland sales hit almost £1 billion
The growing cheapskate population has encouraged a handful of discount retailers to go public on the London market.
Poundland itself floated at 300p in March and the price immediately raced to 390p before falling back to 345p. The chain’s market cap is about £900m.
As you’d expect from a new flotation in a booming sector, Poundland’s recent financial progress is attractive.
Sales last year jumped 13% to almost £1bn, aided by opening 70 more shops, and I reckon July’s final results could show profits of £36m.
Longer term, Poundland reckons it can take its current estate of 517 stores to beyond 1,000 in the UK and Ireland, as well as expand into Europe.
Just so you know, the average transaction in a Poundland shop comes to just £4.44.
22% margins from selling cheap greeting cards?!
Card Factory (LSE: CARD), which sells greeting cards for under £1, is another newly floated discount chain with major growth ambitions.
In fact, the store-count here exceeds that of Poundland at 739, and the target is 1,200 sites — including 100 in Ireland — within ten years.
The group also claims it sells an amazing 26% of all cards in the UK.
Again, Card Factory boasts impressive financial progress. Between 2012 and 2014, sales jumped 23% to £327m and operating profits climbed 25% to £73m.
I also see operating margins are an incredible 22% — which might be due to the company printing all of its own cards.
For the record, Card Factory floated at 225p in May and the price has since slipped to 219p. The market cap is approximately £750m.
Shoes for less than a tenner
Now to Shoe Zone (LSE: SHOE), which also joined the market in May. At 176p, these shares are 16p up on the flotation price and currently value the chain at almost £90m.
Shoe Zone has a sizeable high-street presence, with 553 shops last year selling 20 million pairs of shoes to support a 3% market share. The average retail price per pair is a mere £9.77.
Unlike Poundland and Card Factory though, Shoe Zone’s recent financials are not mega-impressive. Yearly sales improved by just 4% between 2011 and 2013, while profits have declined slightly.
The expansion prospects do not look obviously handsome, either — adding five new stores a year certainly seems very tame.
However, there are plans to relocate smaller shops to larger sites and increase the ‘cash contribution’ per store by 30% to £70,000 by 2017.
For this reason alone, the chain is my favourite of the three
The sad irony with these three discount chains is that their shares are not exactly valued at bargain-basement levels.
Indeed, both Poundland and Card Factory were floated by private equity groups — who are not known for giving away discounted offers to ordinary investors.
According to my rough sums, Poundland is valued at an immense 30 times near times earnings, while Card Factory could trade at 16 times if I take account of its substantial debts.
Meanwhile, Shoe Zone looks better value trading at about 13 times profits.
Interestingly enough, Shoe Zone remains a family-controlled business, which in my experience should help it deliver more dependable long-term returns to shareholders. For that reason alone, the chain is my favourite of the three.
But until there’s a knock-down share price on offer, I have to admit my bargain-hunting ways tell me to just watch all three names for now.
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Maynard does not own any share mentioned in this article