One retail stock I’d buy and one I’d sell right now

Primark Store

Signs of rising stress on household budgets would encourage me to give car dealership Inchcape (LSE: INCH) an extremely wide berth.

Analysts at Barclaycard were the latest to cast a shadow over the British retail sector this week, announcing that consumer spending growth slowed to 2.5% in June, the lowest figure for 15 months.

The credit card giant noted that shoppers started to scale back “as the rising costs of essentials prompted consumers to row back on some ‘nice-to-haves’ and come to terms with a ‘new normal’ of subdued wage growth and creeping inflation.” And Barclaycard noted that those respondents who consider themselves to be confident in the UK economy fell to a seven-month trough of 33% in June.

And this figure is, for my money, likely to sink further in the months ahead should data continue to deteriorate and forecasters keep spooking people with scary economic reports.

Ratings agency S&P was the latest to get in on the act this week, predicting that UK GDP expansion would cool to 1.4% in 2017 and 0.9% in 2018, down from 1.8% last year. And the organisation warned of considerable downside risks to its already-insipid forecasts should Brexit negotiations hit trouble.

Sales already stalling

These pressures are already hampering conditions on the forecourt. Latest trade numbers from the Society of Motor Manufacturers and Traders (SMMT) showed new car registrations drop 4.8% month-on-month in June, to 243,454 units.

The industry is being whacked by a double-whammy of falling demand from private customers and business, as well as increases in the Vehicle Excise Duty that came into effect in April. And I expect sales to keep sinking as shoppers’ appetite for discretionary, big-ticket items falls, and the uncertain political and economic outlook causes industry to keep investment on a tight leash.

City analysts have been busy downgrading their earnings estimates for Inchcape in recent months as the environment has worsened, and an 8% increase is anticipated for 2017. And I reckon more downgrades could be just around the corner as Britain’s economy toils.

So I reckon investors should give the business short shrift right now, even in spite of its low paper valuation of 11.8 times forward earnings.

Increasingly fashionable

I am far more optimistic over the earnings outlook of Associated British Foods (LSE: ABF), and believe intensifying pressure on shoppers’ wallets could drive demand at its successful discount fashion Primark division to the stars.

The London-based company saw total sales at its budget clothing arm rise 13% at constant currencies during the 40 weeks to June 24th, with UK sales rising 9% and market share continuing to rise. And the brand continues to make a big impression overseas, too, with parent ABF advising that early trading at its new stores in the US, Spain, Italy, Belgium and the Netherlands, as well as Britain, has been “good.”

With ABF’s other divisions also gaining momentum, the number crunchers expect earnings growth to rev to 15% in the year to September 2017. A further 9% advance is predicted for fiscal 2018.

While these bubbly growth forecasts result in a conventionally-high prospective P/E rating of 23.3 times, I reckon Associated British Foods’ brilliant sales momentum and exciting expansion plans makes the stock worth every penny.

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Royston Wild 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.

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