The prospects for retail shares Next plc (LON:NXT) (NXT.L), Tesco PLC (LON:TSCO) (TSCO.L), J Sainsbury plc (LON:SBRY) (SBRY.L) and Marks and Spencer Group Plc (LON:MKS) (MKS.L) may seem to be downbeat at the moment. Consumer confidence has been weak for a number of months, and is expected to remain so in the near term. But do they now offer appealing risk to reward ratios?
Tesco’s investment potential has increased in recent quarters in my view due to its strategy change. It is now focused on its core UK operations, where efficiency and customer service have been central to its delivery of 10 successive quarters of sales growth.
More growth could be ahead in my view. The deal to purchase Booker could strengthen its financial outlook, while a supply arrangement with Carrefour may make the business more efficient. With a PEG ratio of around 0.9, I think the Tesco share price could offer good value for money.
Sainsbury’s could also be a strong performer in the long run. The company’s merger with Asda could create a strong competitor in what remains a crowded retail industry, with it likely to benefit from cost advantages and synergies.
With the Sainsbury’s share price having risen significantly in recent months, it now has a dividend yield of around 3.5%. While not the best value share in the FTSE 100, I think it could deliver impressive total returns.
Next’s financial prospects appear to be relatively sound. The company has a loyal customer base according to my research, and has been able to deliver impressive sales growth in recent months relative to its peers.
With its online division performing well and it having a good track record of growth in difficult operating conditions, I think the Next share price could beat a number of its FTSE 100 retail peers over the medium term.
Marks and Spencer’s current strategy appears to be sound in my view. It involves a greater focus on the fundamental aspects of its business, and this could lead to a more competitive operation in terms of online, for instance.
It may take time, though, for Marks and Spencer to adapt to changing retail conditions. The operating environment for bricks-and-mortar retailers could remain tough, and this could hold its share price back to some degree in the short run. In the long run, though, its 6% dividend yield could make it relatively attractive.