Trying to find a retail stock with good growth prospects and a reasonable valuation isnt easy. The supermarkets still look risky, while online plays like ASOS seem very expensive.
All three companies reported strong sales growth and said they expect full-year results to be in-line with expectations, but theyre far from equal as potential investments, as Ill explain.
Pets At Home
Shares in Pets At Home have fallen by 11% since the firms IPO in March 2014.
However, todays news that like-for-like revenue rose by 4.1% during the third quarter helped lift the shares by 3.5% this morning.
Although no profit figures were given today, Pets reported a gross margin of 53.8% for the first half of last year, along with an operating margin of 12% both impressive figures.
Pets currently trades on a full-year forecast P/E of 15.5, falling to 13.9 for 2015/16. That doesnt look unreasonable, to me.
Halfords recently received a blow when its highly-rated chief executive, Matt Davies, announced he was leaving to run Tescos UK operations.
Mr Davies, who previously ran Pets At Home, has made good progress at Halfords, and looks likely to leave the retailer on a high the firm said today that like-for-like sales rose by 6.6% during the 41 weeks to 9 January 2015.
Halfords enjoys an operating margin of 8.3% and trades on a full-year forecast P/E 14.3. Coupled with a prospective yield of 3.5%, I think thats reasonably good value.
Todays update from Poundland doesnt seem to have lived up to investors expectations, and the firms share price is down by nearly 5% as I write so what went wrong?
Total revenue rose by 10% during the third quarter, but unlike its peers, Poundland did not break this down into total sales and like-for-like sales. This deliberately vague reporting suggests to me that like-for-like sales may have been unimpressive, and most of the increase may have come from new stores.
Poundland currently trades on a current year forecast P/E of 26, despite having a measly 2.5% operating margin. Thats just too expensive, in my view.
Todays best buy?
In my view, Halfords and Pets at Home are both reasonable buys in todays market. Although neither is an outright bargain, both appear to be well-run businesses with a large share of a profitable niche. This should be good for long-term profit margins.
If you’d like some more suggestions for companies whose size and quality gives them a strong defensive ‘moat’, then I’d urge you to take a look at “5 Shares To Retire On“.
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