And based on today’s results from the company, it looks as if Laura Ashley’s outlook isn’t going to improve anytime soon. For the 52 weeks to 30 June 2017, the company’s like-for-like retail sales declined 3.1%. Online sales grew by 5.6% on a like-for-like basis, this improvement was not enough to offset declining physical store sales. 

For the year, group sales were £277m compared to £401m last year, although I should point out that the last comparable period was 74 weeks long, so the figures are difficult to compare. 

Group profit before tax and exceptional items was £8.4m for the year ending 30 June, compared to £24.7m for the comparable period (74 weeks long). Statutory profit before tax after including an exceptional charge of £2.8m was £6.3m compared to the comparable period’s £22.8m. Based on these numbers, according to my calculations, on a weekly basis for the previous 74 week period, the company earned £308,000 per week giving a 52-week earnings estimate of £16m. This indicates a 60% decline in statutory profit before tax. These figures are only a back-of-the-envelope estimate. 

City analysts are currently expecting the company’s fortunes to recover next year, with a 17% increase in earnings per share projected and if the company can hit this target, then the shares might be an attractive buy for value investors. Based on current estimates, shares in Laura Ashley trade at a forward P/E of 6.5. 

However, if you are looking for a cheap retail turnaround, I believe high street giant Next (LSE: NXT) would be a better pick.

Well-placed for growth

As customers continue to migrate from brick and mortar stores towards e-commerce, Next is better placed than most of its peers to capitalise on this trend. The Next Directory business is already well established among customers, and the infrastructure is in place for growth. 

Indeed, the trading update published at the beginning of August revealed that total group sales had fallen by just 1.2% for the 26 weeks to 29 July. While this performance is disappointing it is still significantly better than that of Laura Ashley’s like-for-like decline of 3.1%. 

Rewarding shareholders 

As well as chalking up better sales growth, Next is also planning to return more cash to shareholders. For the full year, management is targeting a cash return of £275m through four quarterly special dividends this year, giving a total yield, including regular payouts, of 8.6%. Laura Ashley announced today that it is planning to skip its final dividend, cutting its yearly payout from 2.5p to 0.5p. 

Next’s valuation is also attractive. Shares in the company trade at a relatively attractive forward P/E of 9.5. So overall, Next appears to be a much better buy than struggling turn around Laura Ashley. 

The post Why I’d sell this turnaround stock to buy Next plc appeared first on The Twelfth Magpie.

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Rupert has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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

Flower down

Laura Ashley has given advance warning of bad news in its full-year results, to be published on 23 August. These will show an exceptional £2.8m impairment charge due to the revaluation of a freehold property owned by the group. Management has previously warned that trading conditions are “demanding“, and the board now expects net pre-tax profits to be materially below market expectations. The fact that its share price is down just 4.44% as a result suggests to me that markets weren’t expecting much of the firm anyway.

This is its second recent profit warning. In February, the £62.59m business reported a drop in pre-tax profit from £11m to £7.8m for the 26 weeks to 31 December, amid continued market challenges. Chairman Tan Sri Dr Khoo Kay Peng blamed a failure to meet sales and margin targets and to maintain or increase market share, amid “well-documented pressures in the broader commercial environment”.

Brexit bites

Those pressures haven’t eased, nor have Laura Ashley’s problems as wages are squeezed and Brexit uncertainty erodes consumer sentiment. Even a “great British brand” (albeit one owned by a Malaysian group) cannot escape the fallout. Management is embracing modernity, using the web to attract a larger international audience. British tradition still sells in parts of the world (often better than in Britain itself).

The numbers suggest a business in deep trouble, with a valuation of just 4.89 times earnings, and a dividend yield of an almighty 19.6%, covered just once. The market expects revenues to fall from £400m in 2016 to £286.6m in 2017, with earnings per share (EPS) down 35%. Thereafter we may see some stability, with EPS expected to rebound 17% in 2018. Some might consider this an exciting buying opportunity but I suggest you chuck out the chintz.

Sofa, so bad

Laura Ashley isn’t the only furnishings retailer in trouble right now. DFS Furniture (LSE: DFS) issued a profit warning in mid-June, after previously warning of a softer market environment, with significant declines in store footfall hitting customer orders.

Falling demand is a sector problem, just ask Laura Ashley. DFS expects these problems to be short-term but in these uncertain times, who knows? Last week’s post-close trading update inflicted further damage, with second half revenues down 4% year-on-year, following an increase of 7% in the first half. However, falling revenues will be partly offset by cost-cutting and operating efficiency initiatives.

Joules to the rescue

EPS are expected to fall 16% this year, but 6% rebound in 2017. The forecast yield is 5.6%, with reasonable cover of 1.7. Management is forward-looking, opening new stores under the DFS brand and seeking to purchase complementary business Sofology, which boasts a strong technology-led omnichannel proposition.

The £459m company has also announced a new exclusive partnership with booming upmarket lifestyle brand Joules. Its current valuation of 4.59 times earnings tells you that investing in DFS will not be a comfortable experience, but could ultimately prove rewarding. Not one for couch potatoes though.

The post One retail turnaround stock I’d sell and one I’d buy appeared first on The Twelfth Magpie.

More reading

• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• With a 7% yield, is this dividend share a no-brainer?
• The CMC Markets share price is smashing the FTSE 100 in 2026. Is there an opportunity here?
• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?

Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

The update will come as a relief to many shareholders, who have suffered over the past year as the value of Mothercare’s shares have been cut in half thanks to weak trading and a loss of confidence. 

But now it looks as if management has finally drawn a line under the company’s troubles. Over the 13-week period to January 7, UK like-for-like sales grew 1%, and overall UK sales rose 0.6%. Online sales for the period increased 5.5% and now represent 40% of UK sales. International retail sales fell 6% in constant currency and grew 13% in actual currency, reflecting ongoing tailwinds from weak sterling. Overall for the 13 weeks to 7 January, total group sales grew 1.8% year-on-year and are up 0.2% year-to-date. During the period the company opened 40 new stores, closed 28 and reduced its UK footprint by 4.5%.

Starting the turnaround 

Overall group sales growth of 1.8% year-on-year during the third quarter may not be the most impressive figure, but it’s a welcome turnaround from the first-half performance. For the first half of Mothercare’s financial year, the company reported a 0.6% contraction in total group sales year-on-year and a 15.7% drop in underlying group profit before tax.

While investors will have to wait for the full-year figures before they’re able to assess whether or not Mothercare’s recovery is truly under way, today’s update has gone a long way towards reassuring the market that the group is heading in the right direction. 

And hopefully, the improved trading figures will help restore investor confidence in the firm. Thanks to a lack of investor confidence, shares in Mothercare have lost 57.4% of their value over the past 12 months and are currently trading at a discount to the wider apparel sector. 

Specifically, at the time of writing shares in Mothercare are trading at an EV to EBITDA ratio of 7 and a forward P/E ratio of 12.1 compared to the apparel sector average of 8.7 and 18.6. If Mothercare’s turnaround has legs, there’s no reason why the shares can’t command a sector average P/E, which would take them to around 175p based on current City forecasts. However, it might be difficult for the market to give the company such a valuation so more a conservative estimate of 150p per share, or 30% above current levels might be more appropriate.

A yield play?

The one drawback of Mothercare is that the shares don’t offer a dividend of any kind. If you’re looking for a retail turnaround that also offers an attractive dividend yield Laura Ashley (LSE: ALY) might be a more appealing opportunity. 

At present shares in Laura Ashley trade at a forward P/E of 10.8 and City analysts expect the group to pay 2p per share in dividends per year for the next two years. If the company hits this target, investors are set to receive a dividend yield of 10.3% per annum, which works out as a return of 20.6% from dividends alone between now and the end of the group’s 2018 financial year. 

The post Can Mothercare plc rise 30% after today’s update? appeared first on The Twelfth Magpie.

More reading

• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• With a 7% yield, is this dividend share a no-brainer?
• The CMC Markets share price is smashing the FTSE 100 in 2026. Is there an opportunity here?
• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?

Rupert Hargreaves has no position in any shares mentioned. 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.