Buy or sell? Retail Food Group Limited and Myer Holdings Ltd

So far in 2016 Retail Food Group Limited (ASX: RFG) has outperformed the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) by some distance. Year-to-date its share price has climbed just under 10%, whereas the index has declined by over 6%.

It hasn’t been the same the story for shareholders of Myer Holdings Ltd (ASX: MYR) unfortunately. Despite a strong post-interim results rally the share price has shed those gains and dropped back down to a 7% decline year-to-date.

Priced at 12x estimated FY 2016 earnings Myer is certainly on the cheap side. But the big question investors need to ask is whether or not the company can achieve what the market expects of it.

There has been positive data released by the Australian Bureau of Statistic that showed strong year-over-year growth in department store retail sales. If this is sustained it could certainly be a sign that things are picking up.

But conversely, there are fears in the market that the unseasonably warm weather that much of Australia is experiencing right now could be a problem for a lot of retailers.

U.S. and U.K retailers went through the same thing last year, causing increases in inventory and lower levels of sales. According to CNN, it is estimated by experts that apparel retailers in the U.S. lost almost $600 million in sales because of the mild weather in November and December. For this reason, I would suggest avoiding Myer for the time being.

Whilst it may have been bad news for these retailers, it wasn’t for restaurants and cafes which benefitted from the mild winter. Experts believe that warmer temperatures can help cafe and restaurant traffic as people tend to be out of their homes more.

If the mild weather does persist then I would expect it to be a boost to Retail Food Group’s growth prospects. Retail Food Group is the franchisor of brands such as Gloria Jean’s, Donut King, and Michel’s Patisserie.

It has over 2,500 outlets in operation and plans to add a further 250 before the end of the current financial year. Its strong presence will almost certainly capture any growth in traffic.

Priced at just 12x earnings compared to the market average of over 15x earnings, I feel Retail Food Group is a great buy today. Better yet is the fact that it is estimated to pay a fully franked dividend with a 5.8% yield.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia owns shares of Retail Food Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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