Three top retailers with more room to grow

Standout: Ted Baker fashions
Standout: Ted Baker fashions
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Many investors won’t touch the shares of retailers with a barge pole.

It’s not hard to see what frightens them off - retail is a cut-throat industry. Margins tend to be thin, overheads high, and competition extreme. So much change and upheaval can take place overnight - tastes and preferences, how we shop, where we shop -- that a lot of investors dodge the sector entirely.

But I’m personally a big fan of retail shares - and I think there’s big money to be made over the long-term by identifying the right ones for your portfolio.

You see, while the consequences of investing in a declining retailer can be disastrous, I think you can do very well by unearthing the sharpest, best-managed retailers that still have room to grow. The path to growth for these companies is often straightforward - keep applying the same proven model in new stores, using their healthy cash flows to fund further expansion. Finding these retail gems isn’t easy, but the long-term pay-off can be impressive.

So let me present you with three retailers that I think could fit that billing - and might be a savvy buy today.

1)Domino’s Pizza

Selling pizza might not be glamorous, and there’s no shortage of other restaurants, chains and takeaways selling Italian fast-food in 2014. But the ruthless efficiency, impressive growth potential and an intelligent business model all make Domino’s a slice above the rest.

An incredible franchise success story, the UK version of Domino’s Pizza bought the license from the original American parent company in 1993. Since then, the UK company - which you can invest in on the London Stock Exchange - has allowed franchisees to open and operate 800 Domino’s Pizza restaurants across Britain. Domino’s helps their franchise partners set up their restaurants, gives them the necessary recipes and kit, and takes a cut of around 40 per cent of the profits.

It’s a great business model that has allowed Domino’s to earn 17-20 per cent margins and to fund its rapid expansion. An innovator in internet sales, Domino’s was one the first to really grasp online deliveries, and has been leading the market since. Now holding the rights to expand in Germany and a host of other European nations, Domino’s proven model could still have a lot of room to expand.

2)Ted Baker

A few weeks ago I mentioned the long-term potential of luxury goods giant Burberry, but there’s more than one way to invest in original British fashion. Ted Baker is a much smaller name - eight times smaller in fact, by market value -- but I think the brand could have a lot more room to grow globally. Since 2010 alone, the company’s sales have doubled, and look set to expand further.

It’s yet another unspoken British international success story that so often goes under the radar. Sales in North America have grown six-fold in the last four years to more than £60m, while the company has built a successful Asian business virtually overnight.

The shares, like their suits, look rather pricey at 22x this year’s earnings. But after recently dropping by almost 20%, I think this could be a great opportunity to take a closer look at this desirable business.

3)Majestic Wine

Selling wine isn’t easy these days -- not now the supermarkets are so ruthlessly cutting prices to draw in customers. But rather like its wine, Majestic’s shares are for the more refined palette, and discerning buyers might want to take a closer look at this specialist retail gem.

Some investors drunkenly rushed for the exits last month, after the company revealed investment plans to power its future growth. But while others might have bottled it, here at the Motley Fool, we’re much more interested in the big long-term picture than most fund managers.

I think Majestic have wine retailing down to a fine art. Its focus on staff and in-store experience really set the company apart, and there definitely seems to be room on the high-street for a specialist wine retailer, catering to customers who know their Chablis from their Chardonnay.

But if retail shares aren’t for you, or you’re looking for alternative long-term investment ideas, check out the Motley Fool’s five shares to retire on for five free bonus share recommendations. All five shares offer a mixture of illustrious histories, dependable dividends and international potential - and the report is completely to download, no strings attached.

DOMINO’S PIZZA

Food Retailer

Ticker: DOM

Price: 524p

Market Cap: £868m

Profits: £37m

TED BAKER

Fashion Retailer

Ticker: TED

Price: 1849p

Market Cap: £807m

Profits: £29m

MAJESTIC WINE

Wine Retailer

Ticker: MJW

Price: 466p

Market Cap: £306m

Profits: £17m