Carnage on the high street has sent investors running away from the retail sector, leading to some fantastic bargains for value seekers to take advantage of.
Some of these opportunities are better than others. For example, while shares in Brown (N.) Group (LSE: BWNG) might look like a steal at current prices, the companys falling earnings concern me.
Struggling to grow
According to City analysts, N Browns earnings per share are set to decline by a staggering 71% this financial year to 22.6p. A slight recovery is expected for fiscal 2021, but this wont be enough to offset the decline.
Unfortunately, it doesnt look as if the company will meet this target. Analysts were expecting the firm to report a slight increase in revenues for the year, but according to a trading update published by the firm today, total group revenues declined by 3.8% year-on-year during the 13 weeks to the 1st of June 2019.
Digital revenues increased by 3% during the period, and financial services revenues increased 8%, but this wasnt enough to offset an overall decline in product revenues of -5.4%. According to management, this decline was in line with our strategy of scaling back unprofitable offline marketing and recruitment.
If this trend continues throughout the rest of the year, I think it is going to be difficult for the company to meet the Citys earnings target, and this could mean the stock might fall further from current levels.
Indeed, N Browns current valuation tells me that the market isnt expecting much from the company for the foreseeable future, and todays trading update appears to support that view. With that being the case, Id avoid N Brown for the time being.
A sector leader
If youre looking for a replacement for N Brown in your portfolio, then I highly recommend taking a look at Next (LSE: NXT).
In my opinion, Next is one of the best retailers in the UK, and the company is coping really well with the current retail environment. Sales are still growing at a steady clip, and management is working hard to squeeze costs from the business wherever possible. Full price sales in the 13 weeks to 27 April were up 4.5% on last year.
On top of this growth, the company is trying to reduce its rent roll and improve efficiency with online sales. By processing returns and orders in stores, rather than in dedicated warehouses, Next believes it can cut the cost of processing each online order substantially.
Despite these efforts, City analysts are still expecting the firm to report a near 10% decline in earnings per share for the year. This decline is disappointing, but considering the fact that Nexts earnings are only projected to slide 10% when so many other retailers are collapsing into bankruptcy, this modest contraction is impressive in my eyes.
Thats why I think the company would suit my portfolio today. To add to its appeal, shares in Next currently support a dividend yield of 3% and management is looking to return an extra 300m of surplus cash to investors this year on top of the regular dividend.
If youre looking to supplement your salary or pension with regular dividends, then this special free investing report could be a great place to start! A Top Income Share From TheMotleyFoolUK profiles a company that youre bound to have heard of but what you may have overlooked is the current near-6% yield on offer that our MotleyFool analyst believes is comfortably covered by profits and by the firms cash flow. Click here to claim your free copy now!
