I'd sell Unilever plc to buy this retail growth star

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Joules

Upmarket fashion chain Joules Group(LSE: JOUL) has just issued its Christmas trading update and the market is a little underwhelmed, the stock down 1.13% at time of writing. That's a rare setback for this premium lifestyle brand, whose share price has leapt 56% from 194p to 302p since listing on the market in late 2016.

Joules in the crown

On 12 December, Joules gave investors an early Christmas present by posting an 18% jump in first-half revenues, despite describing market conditions as "challenging", something that has hit other premium retailers. Today's festive missive, which covers the trading performance of its retail business for the seven-week period to 7 January, goes one step further, with total retail sales growth up 19.2% year-on-year. If investors are unimpressed, they clearly have high expectations.

Today's short and sweet update reported continued growth across both its store and e-commerce channels. Retail gross margins are holding steady as the £268m group maintains its "disciplined and selective approach to promotional activity"CEO Colin Porter said retail performance through the Christmas trading period is "testament to the strength of the Joules brand, unique product proposition and customer engagement".

British is best

I have long admired Joules for its strong brand positioning, with its focus on "quality, Britishness, family values, colour and humour," and the strategy works beyond these shores, in the US, Germany, France and other European markets. It has 118 stores in the UK and a further 1,500 stockists worldwide. 

The one sticking point is its valuation, with the stock trading at a pricey 33 times earnings for 2017. However, that will be trimmed to 22.8 times in 2018, as earnings per share (EPS) growth moves on at a clip. It was a bracing 43% in 2016 and 33% in 2017, while City analysts now look forward to a healthy 19% in 2018 and 25% in 2019. Premium brand, premium price, premium prospects. It all fits.

Consumer goodie

Global household goods giant Unilever(LSE: ULVR) is a long-standing favourite of mine, and not a stock I would be in any hurry to sell. The failed Kraft-Heinz bid appears to have liberated management to take tough decisions, offloading its spreads business for EUR6.8bn, at a trailing valuation of 10 times EBITDA.

The Anglo-Dutch company is also looking to unify its corporate structure, to create a single leaner, more agile head office, although we have no decision yet. It is no respecter of its own traditions, as the recently announced closure of its Colman's factory in Norwich confirms.

Connect 4

Unilever's Connected 4 Growth programme is currently targeting healthy underlying sales growth of 3%-5% per year between now and 2020. Its stock is up 24% in a year, although it has slipped 6% in the last three months.

The £50bn FTSE 100 stalwart is also trading at a premium, as it usually does. However, today's 25.3 times earnings multiple is forecast to fall to 19.2 in 2018. Anticipated EPS growth of 20% in 2017 and 9% in 2019, allied with a forecast yield of 3.3%, confirms the strong 'buy' case for Unilever, even as the FTSE 100 yields nearly 4%.

After saying that I'd sell Unilever to buy Joules, having looked at my own arguments, I am struggling to build an active 'sell' case for this sturdy blue-chip. Maybe pop both Joules and Unilever on your watchlist and wait for a market dip to trim those valuations?

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Joules Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.


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