Relentless bad news from the retail sector has driven down the valuations of individual firms. But not all retail businesses are failing. Some are adapting well to the changing retail environment and their finances look surprisingly robust.
In an out-of-favour sector like retail now, I think the canny investor can find some stocks that have enormous potential to deliver investor returns going forward as valuations rebound and forward growth develops. Looking for the ‘strong survivors’ in the retail sector could be a good tactic to introduce significant growth into your retirement portfolio, so I’m looking at the FTSE 100’s clothing, footwear, accessories and home products retailer Next (LSE: NXT).
Migrating to online sales
The company has a formidable brand that most people recognise, but as with other retailers, the bricks-and-mortar-based business is struggling. We’ve become used to Next reporting declining sales figures for its shops, but that’s not the whole story. Unlike some retailers, it has a vibrant online business and click-generated sales have risen faster than shop sales have declined. Next is making a good job of migrating its business to online, a tactic that I reckon will help it survive and thrive in the years to come.
10 years ago, the shops business delivered around 67% of revenues and profits. In 2018, the directors expect sales from the shop estate to generate less than 50% of overall revenue and a mere 30% of profits. That means 70% of profits already come from the online business, which strikes me as a strong position to be in. As long as the store estate doesn’t start wiping out profits by generating losses, I think Next is well placed to deliver growth going forward. City analysts expect overall earning to move up 4% this year and 4% again next year, which is encouraging. I reckon Next is attractive and well worth your research time right now.
Meanwhile, furniture and flooring retailer SCS Group (LSE: SCS) is shooting up today on the release of the full-year results. The figures are good. Revenue rose 1.3% compared to the equivalent period last year, helped by the opening of a new store in Chelmsford during the period, which raises the store count to 101. Like-for-like revenue managed an increase of 0.2%, which suggests SCS is at least holding its own in the current harsh retail environment.
Profitable growth
Encouragingly, SCS managed to squeeze decent profits from its sales and its earnings per share increased by a healthy-looking 14%, and the directors expressed their confidence in the outlook by pushing up the total dividend for the year by just over 10%. Chief executive David Knight pointed out in the results statement that SCS continued to grow despite “a prolonged period of economic uncertainty and challenging trading conditions,” which challenges my previous assumption that big-ticket items such as furniture would be most vulnerable during challenging trading periods.
One of the things I like most about SCS is its debt-free balance sheet and the more-than £48m pile of cash and advance payments it is sitting on. The firm listed on the stock market during 2015 and the shares have struggled to make progress beyond the listing price close to 200p. However, I reckon the company is poised to do well for investors from where it is now.