As markets around the world plunge, only a few stocks are escaping the turmoil.
One of the companies thats rising in a falling market isMcColls Retail(LSE: MCLS). Attimeof writing, the companys shares have jumped just under 6% today, while the wider FTSE 250 has declined 2.5%.
Whats more, McColls is the only company in the retail sector thats pushing higher today. Indeed, many of McColls larger peers, such asTesco (LSE: TSCO), are falling.
But what makes McColls so special? Well, the company has shown over the past year that it can buck wider market trends. While other retailers have reported falling sales and profits as a price war takes hold across the UK retail landscape, McColls underlying earnings have continued to push higher.
For the six monthsended 31 May 2015, total revenue expanded 3.4% after including the contribution of new store sales. Further,adjusted earnings per share for the period increased 45% to 6.1p, and managementhiked the groups interim dividend payment by 100% to 3.4p.
Struggling to compete
Unfortunately, to a certain extent, the figures above are highly misleading. Underlying figures show that McColls is struggling to compete in the UKs increasingly competitive retail environment.
For example, during the six months to31 May 2015, group like-for-like salesdeclined by 1.9%.Sales in newsagents and standard convenience stores slumped 4.5%, and operating profit before exceptional items ticked lower by 6% to 9.6m. Revenue growth was driven by the opening of new stores. 25 news McColls stores were opened during the period.
And while McColls shares may be outperforming those of its larger peer Tesco today, over the past 12months the two retailers have clocked up similar performances. Specifically, over the past year McColls shares have declined by 22% and Tescos shares have fallen 26%. Year to date, McColls has slumped 19%, compared to Tescos 3%. However, these figures exclude dividends. At present, McColls supports a dividend yield of 7.2%, and the payout is covered one-and-a-half times by earnings per share. On the other hand, Tescos dividend yield is a paltry 0.3%.
Changing retail landscape
So, if youre looking for a defensive dividend play, McColls could be the company for you. But, as larger peers like Tescoget their act together and start to adjust to the UKs new retail landscape, smaller players like McColls could struggle.
Tescos actions to entice customers back into its stores are already having an effect. During the 13 weeks ended 30 May 2015, Tesco reported like-for-like volume growth of 1.4%, although saleslike-for-like sales fell by 1.3%. Still, this decline was better than many analysts were expecting. The City was expecting a decline ofbetween 1.6% and 3%.
Also, Tesco is using its unrivalled size and scale to out manoeuvre smaller peers. Specifically, the retailers banking and international arms are providing a much-needed boost to the bottom line as Tescos domestic business struggles.
Nevertheless, Tesco remains a risky bet at present. The companys turnaround is still in its early stages andthe groups shares trade at a lofty valuation of 22.7 times forward earnings, which doesnt leave much room for manoeuvre if things go wrong. McColls trades at a more attractive forward P/E of 8.9.
All in all, McColls looks cheap, and the companys dividend yield is attractive but over the long term, its unclear if the company will be able to fight off the competition from larger peers.
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Rupert Hargreaves owns shares of Tesco. The Motley Fool UK owns shares of Tesco. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.