The potential impact of Brexit remains a mystery, but results from two UK consumer stocks seem to suggest that the economy remains healthy for now. Shares of both firms have risen sharply this morning, after each reported strong sales growth.
These shares were oversold
Shares of Jet2 owner Dart Group (LSE: DTG) rose by 6% this morning, after the firm reported a 21% rise in sales during the first half of the year. Dart said that post-Brexit bookings “showed no signs of slowdown”. Full-year profits are now expected to be ahead of expectations.
Even before I saw today’s figures, I was fairly sure that the 32% fall in Dart’s share price since May was overdone. Having taken a look at today’s results, I’m certain of it. Dart has a long track record of beating expectations. With the shares trading on just nine times forecast earnings, I believe too much bad news had been priced into this stock.
Today’s figures show that Dart’s sales rose by 21%, to £1,240.8m, during the first half, which includes the key summer holiday season. Operating profit rose by 14% to £167.5m, while earnings per share were 14% higher, at 90.65p.
One concern is that the group’s operating margin fell from 14.4% to 13.5%. The main cause of this seems to be a slight fall in Jet2.com’s average ticket yield and load factor. This comes against a backdrop of strong capacity growth, so this decline may reverse as the new routes bed in. But Dart warned today that upward pressure on costs is likely as a result of the weaker pound.
Today’s 6% climb has left Dart shares trading on a forecast P/E of about 9. I suspect further gains are likely, and rate Dart as a buy.
Too much cheap booze?
I was expecting Dart shares to rise when markets opened, but I was less certain about Majestic Wine (LSE: WINE). The retailer announced a 10.6% increase in underlying sales for the six months to 30 September this morning. This included an impressive 5.7% increase in like-for-like sales from Majestic Wine retail sales.
However, Majestic’s adjusted operating profit fell from £9.2m last year to just £0.7m during the first half. But investors haven’t been deterred and the shares are up 5% at the time of writing.
In my view, the challenge for investors lies in working out where Majestic’s profit margins are likely to end up. One-off factors caused a £4m hit to profits during the first half. But today’s figures also show a 45.3% rise in the group’s administrative costs, and a 1% fall in gross margin.
Majestic says that rising costs and falling margins reflect increased recruitment, the impact of the national minimum wage, and promotional activity to tempt new customers away from supermarkets. The company’s view is that fixed costs shouldn’t rise any further, but that profits should start to recover as sales continue to rise.
Majestic confirmed today that it expects to meet current year consensus forecasts for earnings of 12.6p per share. This puts the stock on a forecast P/E of 25. In my view, that’s high enough until we see evidence that profits are recovering. Personally, I’d hold.
