Robert Stephens discusses the investment appeal of two very different major retail shares.
Even though the retail sector faces an uncertain outlook, there may currently be a number of buying opportunities.
Online-focused retailers such as Boohoo (LON:BOO) could experience a continued tailwind, as consumers transition towards mobile and away from bricks-and-mortar stores.
Meanwhile, Sainsbury’s (LON:SBRY) could offer good value for money following its recent share price fall. Investors appear to be downbeat about the stock after the proposed Asda merger failed to materialise.
Although both stocks face weak consumer confidence in the UK, their strategies and valuations suggest that they could deliver impressive long-term growth in my opinion.
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Online-focused retailers have a significant competitive advantage versus companies with physical stores. Consumers are becoming increasingly comfortable with buying clothing online, with Boohoo’s investment in customer service continuing to improve the customer experience.
Online operators also face lower business rates, which gives them a further cost advantage versus bricks-and-mortar retailers.
Boohoo has been able to put in place a multi-platform business which has helped to diversify its customer base. It is also expanding rapidly internationally, which could allow it to capitalise on high demand in markets such as the US. International expansion also reduces its reliance on the UK, where consumer confidence may remain weak as the Brexit process concludes.
Since Boohoo is forecast to post a rise in EPS of 24% in the current year, its P/E ratio of 57 is easier to justify. Although not a cheap stock, its refreshed management team and the investment it is making in its supply chain could produce consistently high earnings growth over a sustained time period.
At a time when many retailers appear to have the wrong business model due to the evolution of online retail, Boohoo seems to have the right strategy to capitalise on a changing operating environment.
Last week’s decision by The Competition and Markets Authority (CMA) to block the proposed merger between Sainsbury’s and Asda was not unexpected. The CMA had previously raised concerns regarding the potential for price rises, and investors seemed to have priced the prospect of failure into the Sainsbury’s share price.
As a result of its recent decline, the stock now has a P/E ratio of 11. Although there is clearly disappointment that its post-merger plans will now not be executed, the company continues to have a strong position within the supermarket sector.
Although consumer confidence is weak, wage growth is ahead of inflation. This could mean that shoppers are less price conscious than may have been expected during the Brexit process. It could lead to less investment in pricing being required by mid-level operators such as Sainsbury’s, while other factors such as perceived quality, customer service levels and convenience may remain of high importance to consumers at a time when their disposable incomes are rising in real terms.
Sainsbury’s clearly lacks the growth potential of many of its retail sector peers. It operates in a highly competitive industry and is being forced to transition towards an increasingly online future. However, with such a low valuation and more favourable operating conditions than may have been expected, it could offer long-term recovery potential.
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