The retail sector has been under attack from all angles over the past few years. Lacklustre consumer sentiment, a weakening economic outlook and increased foreign and online competition have all played their part. Last year this scenario drove many discretionary retailers' share prices down to multi-year lows, however, this year many of these share prices have rallied back significantly.
This has left many discretionary retail stocks now trading at levels close to the market average in terms of yield and earnings multiple. There are still a select few retailers that are selling on above-average yields that could be worthy of further analysis by income-seeking investors.
The struggle to grow sales at department store Myer (ASX: MYR) has been apparent for some time. Myer's recent third-quarter sales showed a slight uptick though which provides some hope that trends may be improving. The company paid an interim dividend of 10 cents per share, while shareholders will be expecting a higher final dividend, even if just a 10 cent final dividend is paid, the stock is trading on a 7.6% yield.
Country Road (ASX: CTY) recently acquired the Mimco and Witchery brands, which has led to a significant boost in sales. In July, the company updated the market on its expectations for the full year which showed growth in sales on both a comparable store basis and on a total sales basis. Management also stated that it expected profit before tax of between $54 million and $56 million. This profit range is after expensing $8.6 million in acquisition and integration costs related to Mimco and Witchery.
Assuming Country Road meets its guidance this should see the firm earn around 36 cents per share. Furthermore assuming the board pays out 60% of earnings as a dividend, the forward-looking dividend yield is 6% and the price-to-earnings (PE) ratio is less than 10 times.
Foolish takeaway
With so many retailers appearing priced for perfection in what continues to be a tough market – for example OrotonGroup (ASX: ORL) is trading on a forward PE ratio of around 19 and a forward yield of around 3% (assuming a 60% pay-out ratio to company guidance) – investors need to balance their desire to gain exposure to the discretionary retailing sector with the need for prudence. A focus on the higher yielding retailers could be one way to exercise this prudence.
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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.
