Does 4% sales loss on the high street make this stalwart stock a sell?
The UK high street faces a difficult 2017. The potential impact of Brexit may not yet have been felt, with higher inflation on the way and consumer disposable incomes likely to be hurt to at least some degree. Against this backdrop, retailers could see their sales performance come under pressure. Today's update from WH Smith(LSE: SMWH) shows that it's already recording disappointing sales numbers. Its high street sales have fallen by 4%. Does this mean it's a stock to sell?
Although the company's high street sales were in line with expectations, they were nevertheless rather disappointing. On a like-for-like (LFL) basis they fell by 3% in the 21 weeks to 21 January, and on a total basis they were down 4%. This was despite a seemingly sound strategy which included a number of successful ranges, as well as strong promotions in the seasonal stationery categories. An additional 32 Post Offices were opened to give a total of 145 within the stores. With 23 more to open this year, this could prove to be an area of growth for the business.
While the division struggled, there was much more impressive performance from its travel unit. It saw revenue rise by 5% on a LFL basis, and by 10% on a total basis. This was driven by ongoing investment in the business and continued growth in passenger numbers. This was especially the case over the Christmas holiday period. Although 3% of the total sales growth was due to positive foreign currency adjustments, gross margin growth and a significant store opening programme mean that profitability from the division should move higher.
WH Smith is expected to record a rise in earnings of 5% this year and 6% next year. While this is a better performance than for many UK-focused retailers, other retailers such as Tesco(LSE: TSCO) offer more impressive outlooks. For example, it's forecast to record a rise in its bottom line of 31% next year, followed by 30% the year after. This puts the company's shares on a price-to-earnings growth (PEG) ratio of just 0.5, while WH Smith's PEG ratio stands at a much higher and less attractive 2.3.
Of course, Tesco is in the midst of a major transformation programme and that's a key reason why its financial performance is set to improve dramatically. WH Smith arguably offers greater consistency than its retail peer, which may mean lower risk for investors. However, given the uncertain outlook for UK retail, investors may wish to seek out stocks with a wider margin of safety than that offered by WH Smith. As such, while it's not hugely expensive, there may be better options elsewhere in the sector. Tesco is an example, since it offers more growth at a lower price.
While both companies could be hit by Brexit-related problems, Tesco's scope to benefit from a new strategy could help it to buck the wider retail trend. As such, it remains an attractive investment, while WH Smith appears to be a stock to avoid or even sell at the present time.
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Peter Stephens owns shares of Tesco. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.