Since the start of the credit crunch, life has been extremely tough for retailers. Not only have they had to contend with one of the most painful financial periods in living memory, their customers have seen prices rise at a faster pace than their incomes. This has inevitably meant a squeeze on their disposable incomes (in real terms) and the effect of it on retailers has been pronounced.
For example, sales at supermarkets such as J Sainsbury (LSE: SBRY)have been hurt by no-frills, discount retailers such as Aldi and Lidl. In addition, department stores such as Debenhams (LSE: DEB) and Home Retail (LSE: HOME) have also been hurt by a reduction in demand and severe pressure on pricing, as customers have gradually become much more price sensitive than prior to the credit crunch.
Changes Ahead
Looking ahead, though, this could all be about to change. Inflation fell to just 1% last month, partly as a result of low oil prices, while wage rises are set to stay above increases in the price level throughout 2015. This is clearly great news for retailers because it means their customers will have more cash in their back pockets, which could prompt something of a resurgence in sales and margins moving forward.
Of course, shares in J Sainsbury, Debenhams and Home Retail are currently trading at very attractive prices. Thats perhaps to be expected after a number of tough years and, as a result, they seem to offer considerable margins of safety and this makes their shares hugely appealing.
Strong Buys
For example, J Sainsbury has a price to earnings (P/E) ratio of just 10 and, even though its bottom line is currently in decline, the current share price appears to adequately price in yet more bad news for the supermarket. With a new no-frills, discount joint venture with Netto and the potential for increased consumer spending moving forward, J Sainsbury could prove to be a bargain buy at the present time especially when its 5.7% yield is taken into account.
Meanwhile, earnings growth is forecast for both Debenhams and Home Retail next year. In Debenhams case, it is expected to grow its bottom line by 4% and, with a P/E ratio of just 9.4, this seems to equate to excellent value for money. In addition, Debenhams currently yields 4.8% from a highly sustainable dividend that is covered 2.3 times by profit.
For Home Retail, next year holds considerable promise, with it being forecast to deliver bottom line growth of 9%. This is highly impressive and shows that the UK economy is picking up strength. While Home Retail has a P/E ratio of 16.5, there still seems to be upside potential given its strong growth prospects.
Looking Ahead
So, with all three companies set to benefit from real terms increases in disposable incomes in 2015, and their valuations incorporating considerable margins of safety, next year could turn out to be a superb year for investors in J Sainsbury, Debenhams and Home Retail.
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Peter Stephens owns shares of Debenhams and Sainsbury (J). The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
