With the UK economy picking up in recent years, it is perhaps unsurprising that the outlook for the retail sector is rather positive. After all, the credit crunch is now a distant memory and, while the global economy could be hurt by a weaker than expected China, the prospects for UK consumers appear to be bright.
As a result, the retail sector seems to be a sound place to invest for the long term. That’s especially the case since valuations of a number of retail businesses are relatively low and indicate vast capital upside potential.
For example, Debenhams (LSE: DEB) trades on a price to earnings (P/E) ratio of just 10.8. Taking into account its poor past performance, many investors would argue that this seems fair, since Debenhams has posted two successive years of profit decline which saw over a quarter wiped off its net profit figure.
Looking ahead, though, such a low rating could prove to be hard to justify, since Debenhams is expected to grow its bottom line by 4% next year. This has the potential to positively catalyse investor sentiment in the company and, were its share price to trade 30% higher, it would still equate to a P/E ratio of 14, which seems relatively low.
In addition, Debenhams remains an appealing income stock. It currently yields 4% from a dividend that is covered more than twice by profit. This indicates that its shareholder payouts are highly sustainable moving forward.
Similarly, Morrisons (LSE: MRW) also appears to be very cheap given its future potential. Under new management the business is going back to its roots and focusing on its core offering, which was lost somewhat in recent years as shoppers favoured no-frills operators over Morrisons’ focus on convenience and fresh food.
Now, though, Morrisons is making changes to its business which should lead to greater efficiencies, improved customer service and improved sales figures (especially versus poor comparatives). As such, the company’s bottom line is forecast to rise by 17% next year with an improving economy likely to act as a tailwind in future years. And, with Morrisons having a price to earnings growth (PEG) ratio of just 1, even a share price that is 30% higher would equate to a PEG ratio of 1.3, which indicates that growth would still be on offer at a very reasonable price.
Meanwhile, online fashion retailer Boohoo.Com (LSE: BOO) has huge potential to grow, with its presence in international markets providing a degree of diversity should the UK economy undergo a period of uncertainty once interest rate rises commence.
One of the most appealing aspects of Boohoo.Com is its focus on own-brand products. Not only does this provide very healthy margins, it also enables the company to develop a higher degree of customer loyalty than for rival resellers of branded goods. In other words, price may be less of a factor in Boohoo.Com’s sales since its products are unique, whereas resellers of branded goods must compete to a greater extent on price to differentiate themselves from their competition.
As with Morrisons, Boohoo.Com trades on a relatively low PEG ratio, with it currently standing at just 1. A 30% rise in its share price is very realistic and would mean it trading on a still hugely appealing PEG ratio of 1.3.
