3 retail stocks to shop for now

The woes facing the retail sector from the combination of a slowing economy, lacklustre consumer spending and increasing online competition are well and truly known by investors. Despite the tough operating environment, here are three retailers that are still poised to grow their earnings over the next few years.

The Reject Shop (ASX: TRS) continues to grow its business in the discount retail space. The company has over 270 stores with a focus on offering its customers a low price point on a range of merchandise, from everyday essentials through to seasonal merchandise. While The Reject Shop doesn’t immediately look ‘cheap’ from a valuation perspective, its current share price does looks reasonable when consensus earnings for financial year 2015 are considered. With expectations that the company will earn $1.137 per share in 2015, the company is trading on a forward multiple of 15.5.

As reported here, adventure wear retailer Kathmandu (ASX: KMD) announced in mid-September a very high quality full-year profit result of $41 million. The result sent its share price rocketing to an all-time high and led to broker Moelis stating that Kathmandu was a “standout buy and hold within the Small Industrials sector.” With expectations that Kathmandu should be able to grow earnings per share by 15% as it continues to roll out new stores and expand online sales, the current multiple of 16.5 times earnings doesn’t appear demanding.

Thorn Group (ASX: TGA) is part retail business but importantly also part finance business too. Through its Radio Rentals and Rentlo store network the company provides investors with exposure to the household goods rental market. The pick up in housing bodes well for Thorn, while the high cost of living and weak consumer confidence also makes its rental and finance services appealing to certain consumers. Having reported earnings per share of 19.1 cents per share for the financial year to June 2013, the company is trading on an appealing current price-to-earnings ratio of 11.8.

Foolish takeaway

Historically retailing has been a good industry for making money. In recent times structural changes have made investors question whether they should be invested in the sector at all. While it is of course important to be alert to structural changes, it is also important to not ‘tar all retailers with the same brush.’

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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