Life in the UK retail segment has been challenging for some time. In fact, Marks and Spencer (LSE: MKS) has experienced its own unique difficulties for nearly two decades, but especially since the financial crisis began in 2007/08. In the last 10 years, consumer confidence has generally been low, wage growth has been weak and there has been a shift towards online retailing.
Now though, the company could offer investment appeal. Improving trading conditions and a refreshed strategy could make it worth buying alongside another cheap stock that reported encouraging results on Tuesday.
Recovery potential
While M&S has sought to make various changes to its strategy in recent years, its current plan appears to be sound. It involves a refocus on the fundamental aspects of the business, with the company seeking to put in place an improved website and a more efficient supply chain. Alongside this, it is rationalising its asset base, while also seeking to become more competitive in what remains a fast-moving retail space.
The company could be aided by falling inflation, which is now lower than wage growth, while consumer disposable incomes are due to remain positive in real terms over the next few years. As such, the pressure on the UK retail sector that has been felt in the last few years could ease to some degree in future.
Investment potential
With M&S having a price-to-earnings (P/E) ratio of around 12 and a dividend yield in excess of 6%, it seems to offer a wide margin of safety. Since dividends are covered 1.4 times by profit, they appear to be sustainable. Certainly, profit growth may be modest in the near term, with trading conditions still being tough. But with the prospect of a revised strategy and an improving outlook for consumers, the stock appears to have the capacity to deliver improved performance.
Encouraging outlook
Also offering scope for strong capital growth over the medium term is automotive retail group Marshall Motor Holdings (LSE: MMH). The company reported a solid performance in the first half of the year on Tuesday, with its underlying profit before tax expected to be marginally ahead of the record performance delivered in the same period of the prior year. This performance has been driven by tight cost control, the positive impact of the closure of six lossmaking sites and robust trading disciplines.
Looking ahead, there is considerable uncertainty surrounding the automotive industry. Economic challenges may lie ahead, while there remains confusion surrounding diesel products and possible new vehicle supply constraints. However, with a P/E ratio of 8 and a dividend yield of 4% that is covered 3.6 times by profit, the stock seems to have investment potential.
Certainly, Marshall Motor Holdings may endure a volatile period, with the resignation of its CFO adding to its uncertain outlook. But for long-term investors, it may deliver high returns in both a capital growth and income capacity.
