Life as an investor in UK retail companies has been tough in recent years. The credit crunch has caused disposable incomes to come under pressure and, as a result, shoppers have become increasingly focused on price above all else.
While this situation may not last since inflation is now lagging wage growth, the damage has been done to the share prices of retailers such as Tesco (LSE: TSCO), McColl’s (LSE: MCLS) and Debenhams (LSE: DEB). Their share prices have fallen by 31%, 14% and 4% respectively in the last six months alone and, as such, they offer highly enticing valuations.
For example, Tesco now trades on a price to earnings growth (PEG) ratio of 0.7. That’s at least partly because it is due to increase its bottom line by as much as 22% next year, with its turnaround strategy seemingly starting to have a positive impact on the company’s bottom line. Similarly, Debenhams now trades on a price to earnings (P/E) ratio of only 10.2 which, for a company with a relatively loyal customer base, appears to be rather low. And, with McColl’s having a P/E ratio of just 9.2, an upward rerating for its shares seems to be on the cards.
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In terms of positive catalysts to push their share prices higher, all three companies appear to have sound strategies. In Tesco’s case, it is becoming more efficient through stocking a narrower range of products and is also focused on improving customer service levels. This is a prudent approach and should lead to rising profitability as well as a more loyal customer base.
Debenhams, meanwhile, is focused on expanding its online presence and utilising concessions within its stores, such as Costa Coffee. It is also trying to wean itself off over-discounting and running too many promotions, which may boost its top line but do little to aid its bottom line. And, with McColl’s continuing to seek acquisitions as well as offer a wider range of services within its convenience stores (such as Post Office counters), it should deliver improved performance in the medium to long term.
While Tesco currently yields just 0.3%, dividends are due to nearly quadruple next year. Looking further ahead, Tesco has scope to significantly raise dividends due to its low payout ratio. In fact, were it to pay out a modest two-thirds of profit as a dividend next year it would equate to a yield of 4.4%.
For those seeking a high yield now, McColl’s holds the greatest appeal, with its yield standing at a whopping 6.8% and, being covered 1.6 times by profit, it appears to be highly sustainable. Meanwhile, Debenhams remains an appealing income play, too, with a yield of 4.4% due to be paid next year.
So, while their recent performance may have been poor, the valuations, strategies and income potential of Tesco, McColl’s and Debenhams makes them excellent buys at the present time.
