So far 2016 has been a rough year for retailers. After entering the year off the back of a strong 2015, many retailers were trading at premium valuations,valuationsthat left little room for error if things didnt pan out as planned.
Unfortunately, 2015sbuoyantretail environment hasnt continued into 2016, and many retailers are already reporting slowing sales.
The market has punished these companies by downgrading their valuations aggressively lower following these profit warnings. For example, shares inSports Direct International (LSE: SPD) have lost more than 30% of their value this year after the company reported a tough Christmas trading period and then this month, founder Mike Ashley warned that the retailerwas not trading very well.
Sports Directs profits are now expected tobe near the bottom of the 380m to 420m range it published when it blamed warm weather for poor trading over Christmas.In its last financial year, the group made 383.2m of earnings before interest, tax, depreciation and amortisation. Still, despite the lack of growth after recent declines Sports Direct is now trading at a relatively attractive valuation. The companys shares trade at a forward P/E of 9.7 for the year ending 30/04/2016.
Income champion
Sports Directs depressed valuation could attract bargain hunters, but the company doesnt pay a dividend to shareholders. And if youre looking for income,Marks and Spencer (LSE: MKS) could be the answer to your prayers.
Shares in Marks have fallen by 11% so far this year and are down 25% over the past 12 months. However, after recent declines the companys shares have dropped to a more modest valuation of 11.5 times forward earnings and City analysts are expecting the companys earnings to grow by a steady 3% to 8% per annum during the next three years. Further, the shares currently support a dividend yield of 4.4%, and the payout is covered 1.8 times by earnings per share.
Fall from grace
A tougher than expected trading environment has also weighed on the shares ofRestaurant Group (LSE: RTN), which have lost nearly half their value this year after two profit warnings. Last year the groups shares commanded a premium valuation of 22.2 times forward earnings, but now the valuation has fallen back to earth.
Restaurant Groups shares currently trade at a more modest forward P/E of 11.4 and support a dividend yield of 4.5%. That being said, according to current City estimates, Restaurant Groups earnings growth is on track to grind to a halt this year. The companys growth days may be behind it.
Dividend champion
Lastly,NEXT (LSE: NXT), which has seen its share price plunge by a quarter year-to-date.
Last week, Nexts management warned that the trading environment was tougher than expected and the companys competitive advantage over peers was being eroded. Nonetheless, while Nexts growth may slow going forward, the companyis still planningto achieve some growth and Next is well known for its cash returns to investors. Current City figures suggest Nexts earnings per share will expand by 4% for 2017, and the companys shares are expected to support a dividend yield of 7% for the next few years when special dividends are included.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Sports Direct International. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
