It was more of the same from Home Retail (LSE: HOME) when the company reported its first-quarter numbers this morning.
Like-for-like sales at the group’s Argos unit fell 3.9% during the 13 weeks from March 1 to May 30 as competition from online retailers continued to eat away at the unit’s market share.
Things were slightly better at Home Retail’s Homebase arm reported like-for-like sales growth of 5.4%. This performance was driven by inventory sales and store closures. Total sales declined 1.6%.
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More of the same
Home Retail’s sales have been under pressure now for more than five years as the company struggles to compete with specialist retailers and online competitors like Dixons Carphone (LSE: DC) and Amazon.
Indeed, since 2011, Home Retail’s group sales have declined by 2.5%, pre-tax profit has slumped by more than 50% and basic earnings per share have fallen by 40%.
City analysts expect more of the same from the company over the next two years. Home Retail’s earnings per share expected to fall by 5%, to 12.4p during 2015, before rebounding by 9% during 2016 (fiscal 2017 for the group).
Lofty forecasts
At the other end of the spectrum, City analysts have penciled in earnings per share growth of 32% for Dixons this year. And the company is on target to meet this lofty forecast.
Group like-for-like sales expanded by 9% during the fourth quarter of last year, as benefits from the merger with Carphone Warehouse start to shine through. UK like-for-like sales jumped by 13%.
This growth is set to continue as Dixons is only really getting started on its expansion plans.
Growth plans
By the end of the year the Dixons Carphone group will have completed the merger of the old Dixons/Carphone head offices, started the process of merging warehouse operations, built integrated management teams and opened 280 new mobile stores.
On average, Dixons Carphone is opening four new stores each week across its international footprint.
Based on these expansion plans, City analysts expect Dixons’ earnings per share to expand at a compound annual rate of 19.1% through to 2017 — that’s a rate of growth you’d be hard pressed to find elsewhere.
And even after rising around 43% since the merger, Dixons is still undervalued at present levels.
Undervalued
Dixons currently trades at a forward P/E of 19.4. Factor in the company’s predicted growth rate for this year and you get a PEG ratio of 0.6. A PEG ratio below one implies that the company’s shares offer growth at a reasonable price.
In comparison, Home Retail currently trades at a forward P/E ratio of 12.1, which looks cheap, but is an appropriate valuation considering the company’s stagnating sales.
Still, Home Retail’s one advantage over Dixons is the company’s dividend yield.
Home Retail currently supports a dividend yield of 2.6%, and the payout is covered three times by earnings per share. Dixons supports a dividend yield of 1.7%, and the payout is covered three times by earnings per share.
