With consumer confidence falling to its lowest level in five years, the appeal of retailers may have diminished among investors over the last couple of years. Brexit fears seem to be weighing on consumers, and this situation may persist as the process of leaving the EU reaches its conclusion.
Not all retailers are suffering, though. JD Sports Fashion (LON:JD.) and Dunelm (LON:DNLM) are two mid-caps that appear to have sound growth prospects as a result of evolving strategies. Although the wider sector may not be particularly popular, the two stocks could generate high long-term returns in my opinion.
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Dunelm is focusing on its core operations, and has rationalised its overall customer offering. It has closed the Worldstores and Kiddicare websites, which has led to improving margins. It is also investing heavily in its omnichannel capabilities, with a new website set to be launched in the latter part of the current financial year. An improving customer experience remains a key part of its overall strategy, with the offering of Click & Collect expected to form a key part of its overall growth plans.
JD Sports Fashion is also making changes to its business model. The recent acquisition of US-focused Finish Line has helped to diversify the business as part of a wider focus on growing its international exposure. Its recent update showed that new store openings outside of the UK have continued, with further developments in this area expected over the medium term. The company is also seeking to improve its efficiency through investment in its supply chain, with a warehouse extension being evidence of this.
Both stocks performed well over the key Christmas trading period. They are showing little sign of being negatively impacted by weak consumer confidence. Dunelm’s like-for-like (LFL) revenue increased by 9% in the second quarter of the year, with improved sourcing contributing to a higher gross margin. JD Sports Fashion recorded a 15% rise in total sales for the first 48 weeks of its financial year, which included the festive period. Gross margins were maintained versus the prior year, with the company not requiring to engage in discounting in order to boost sales growth.
With Dunelm forecast to grow EPS by 7% in the current year, it appears to offer an improving outlook. Its P/E ratio of 18 may be high relative to some of its sector peers. However, with the potential impact of improved omnichannel capabilities yet to be felt, it could justify a premium valuation – particularly with its sales growth having been strong of late.
JD Sports Fashion is expected to report a rise in EPS of 12% for the 2020 financial year. It has a P/E ratio of 17. While there are cheaper options within the retail sector, the international growth potential of the business suggests that it justifies a higher rating.
Although the wider retail segment may continue to experience an uncertain period, Dunelm and JD Sports Fashion appear to have a mix of sound strategies, improving outlooks and growth potential.