The cost of living crisis has contributed to a weakening in investor sentiment towards the retail sector. Indeed, the share prices of Next (LON: NXT) and Kingfisher (LON: KGF) have declined by 14% and 8%, respectively, since the turn of the year.
With high inflation forecast to rise even further in the near term, and geopolitical risks at heightened levels, the short-term outlook for their share prices remains highly uncertain.
However, on a long-term view, their low valuations, market positions and growth strategies could mean they offer investment potential at the present time.
Next
Next’s most recent trading statement highlighted the company’s strong performance. In fact, full price sales in the eight weeks to Christmas Day were 20% higher than in the same period from 2019. As a result, the company increased its profit guidance for the full year.
Despite its strong recent performance, the firm’s shares trade on a forward price-earnings ratio of just 13. This suggests that they offer a wide margin of safety at a time when many FTSE 350 stocks have significantly higher ratings.
In terms of growth opportunities, the firm’s online presence offers significant long-term potential. It accounts for around 70% of sales in an era where consumers are increasingly shifting to digital avenues. Moreover, Next’s online platform allows third-party brands to sell their products alongside its own items. This not only means greater choice for the firm’s customers but allows the benefit of greater scale in areas such as advertising campaigns that can be shared between Next and its retail partners.
In addition, Next’s international growth opportunities could catalyse its financial performance while offering geographic diversification. Indeed, international online sales grew by 36% in the company’s most recent trading period compared to the same time two years ago. And, with the firm taking equity stakes in companies that use its logistics platform, such as Reiss and GAP, it is becoming an increasingly diverse business that appeals to a wider range of consumers.
Kingfisher
Kingfisher’s shares also seem to offer good value for money compared to a number of FTSE 350-listed companies. They trade on a forward price-earnings ratio of just 11. This suggests they offer a wide margin of safety.
As with Next, the firm’s latest trading update showed strong performance. For example, Kingfisher generated 15% like-for-like sales growth in the third quarter of the 2022 financial year when compared to the same period of the 2020 financial year. It was also able to make market share gains and progress in areas such as expanding Screwfix’s international exposure. As a result, it now expects full-year profit to be at the higher end of previous guidance.
Although it is impossible to determine the extent to which Covid-19 working from home trends will persist beyond the pandemic, it seems likely that home offices will be more prevalent than they were in 2019 and earlier. This could benefit Kingfisher, while the longstanding trend of digital retail sales becoming a larger proportion of total retail spending may mean it is in a solid position to outperform peers due to its strong online presence.
Clearly, weaker consumer spending levels prompted by the cost of living crisis could cause further volatility for Kingfisher’s share price in the short run. Its focus on discretionary, rather than staple, items may mean consumers delay unnecessary spending on its products. However, its low valuation, sound market position and growth strategy suggest that its shares offer long-term capital growth potential.