With a significant decline in inflationary pressures compared to the previous year's highs, there is a strong expectation of an upswing in consumer spending. This change is poised to have a substantial positive impact on the specialty retail industry and companies operating within it.
Given the backdrop, in this article, I have highlighted three fundamentally sound retail stocks Sally Beauty Holdings, Inc. (SBH), Winmark Corporation (WINA), and The ODP Corporation (ODP), which could be solid additions to your portfolio for potential gains. On the other hand, investors could keep a watch over Envela Corporation (ELA), considering its mixed fundamentals.
In August, the Consumer Price Index (CPI) exceeded economist’s predictions slightly, with a month-over-month increase of 0.6% and a year-over-year surge of 3.7%. However, core inflation showed a deceleration, dropping from 4.7% to 4.3% over the 12-month period ending in August, marking its most gradual rate since September 2021.
This trend serves as an indicator that the 11 rate hikes implemented by the Federal Reserve are gradually impacting the economy.
Moreover, retail sales in the United States for August showed a 0.6% month-on-month increase, surpassing expectations of a 0.2% rise and outperforming the revised 0.5% growth seen in July. These figures indicate ongoing strong consumer spending trends, even in the face of elevated prices and borrowing expenses.
Furthermore, shifting consumer demographics, growing urbanization, improved access to credit, infrastructure enhancements, and the influx of international brands are all contributing to the expansion of the specialty retail market.
The worldwide specialty retailers market was valued at $23.20 billion in 2022 and is projected to achieve a value of $42.70 billion by 2031, demonstrating a CAGR of 4% spanning 2023 to 2031.
Overall, the specialty retail industry is poised for a promising future, fueled by factors such as easing inflation, strong consumer spending, and evolving market dynamics. Given the solid industry prospects, let us dive into the fundamentals of featured Specialty Retailers stocks, beginning with number four.
Stock #4: Envela Corporation (ELA)
ELA buys and sells jewelry and bullion products to individual consumers, dealers, and institutions in the United States. It offers jewelry and fine-watch products, including bridal jewelry, fashion jewelry, custom-made jewelry, diamonds, fine watches, and other products.
On September 14, ELA announced its agreement to acquire Steven Kretchmer, Inc., an established jewelry manufacturer, to enhance and diversify its consumer division. ELA believes this acquisition aligns perfectly with its strategic vision of expanding its range of customer offerings and is expected to generate value for its shareholders.
In the same month, ELA announced that as of September 5, 2023, the company had invested over $1.30 million to purchase 224,631 shares of common stock out of the authorized 1,000,000 shares available for repurchase under the current repurchase program.
ELA’s trailing-12-month ROTA of 18.10% is 365.2% higher than the 3.89% industry average. However, its trailing-12-month levered FCF margin of 1.23% is 75.9% lower than the industry average of 5.10%.
For the fiscal second quarter, which ended on June 30, 2023, ELA’s revenue increased 17.9% year-over-year to $50.30 million, whereas its gross margin declined 6.2% from the year-ago value to $10.76 million.
During the same period, the company’s net income and EPS amounted to $1.60 million and $0.06, respectively. Also, its cash and cash equivalents came in at $18.38 million, up 7.1% versus $17.17 million as of December 31, 2022.
Analysts expect ELA’s revenue for the third quarter (ending September 2023) to increase 14.5% year-over-year to $51.73 million. However, its EPS for the same period is expected to decline 41.7% year-over-year to $0.07. Additionally, the company topped its revenue and EPS estimates in three of the trailing four quarters.
ELA’s revenue and EBITDA have grown at CAGRs of 27.9% and 41.5% over the past three years, respectively. Likewise, over the same period, its net income and EPS have improved at CAGRs of 55% and 59.8%, respectively.
The stock has lost 6.5% year-to-date to close the last trading session at $4.92.
ELA’s POWR Ratings are consistent with this outlook. It has an overall rating of C, translating to Neutral in our proprietary rating system. The POWR ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #19 out of 42 stocks in the Specialty Retailers industry. It has a C grade for Growth, Value, Momentum, Stability, and Quality. Click here to see ELA’s additional rating for Sentiment.
Stock #3: Sally Beauty Holdings, Inc. (SBH)
SBH operates as a specialty retailer and distributor of professional beauty supplies. The company operates through two segments: Sally Beauty Supply and Beauty Systems Group.
On September 1, SBH introduced the third addition to its bondbar product range. By introducing a collection of permanent shades thoughtfully crafted to include built-in bond repair capabilities, SBH aims to revolutionize hair care and reimage the world of hair color.
In addition to the new hair color options, SBH is also launching four innovative bonding products, which comprise a groundbreaking shampoo, as well as three versatile styling products, marking a first-of-its-kind offering in the market.
SBH’s trailing-12-month gross profit margin of 50.61% is 42.9% higher than the 35.41% industry average. Its trailing-12-month ROTC of 9.93% is 64.2% higher than the industry average of 6.05%. Likewise, the stock’s trailing-12-month ROCE of 41.70% is 272.1% higher than the 11.17% industry average.
For the fiscal third quarter, which ended on June 30, 2023, SBH’s net sales amounted to $931.01 million, while its gross profit came in at $474.71 million. The company’s net earnings increased 9.1% and 6.9% year-over-year to $50.82 million and $0.46 per share.
In addition, during the same period, its cash and cash equivalents came in at $74.34 million, up 5.4% compared to $70.56 million as of September 30, 2022.
The consensus revenue estimate of $968.45 million for the first quarter of fiscal 2024 (ending December 2023) represents a 1.2% increase year-over-year. The consensus EPS estimate of $0.55 for the same quarter indicates a 5.4% improvement year-over-year. Moreover, the company surpassed the consensus EPS and revenue estimates in three of the trailing four quarters, which is promising.
Its revenue and EBIT have grown at 2.3% and 3.8% CAGRs over the past three years, respectively. Also, its net income and EPS increased at CAGRs of 13.4% and 15.9% over the same period, respectively.
SBH’s shares have lost marginally intraday to close the last trading session at $8.85.
SBH’s POWR Ratings reflect this solid outlook. The stock has an overall B rating, translating to Buy in our proprietary rating system.
It has a B grade for Value and Quality. In the same industry, it is ranked #14. To see additional POWR Ratings of SBH for Growth, Momentum, Stability, and Sentiment, click here.
Stock #2: Winmark Corporation (WINA)
WINA is a resale company that operates as a franchisor for small businesses in the United States and Canada. The company operates in the Franchising segment and Leasing segment.
On September 1, WINA paid its shareholders a quarterly dividend of $0.80 per share. The company’s annual dividend of $3.20 translates to a 0.83% yield on the current share price. While its four-year average dividend yield is 2.19%. Its dividend payouts have grown at CAGRs of 55.4% and 41.9% over the past three and five years, respectively.
WINA’s trailing-12-month gross profit margin of 93.80% is 164.9% higher than the 35.41% industry average. Its trailing-12-month ROTC of 152.78% is significantly higher than the industry average of 6.05%. Furthermore, the stock’s trailing-12-month net income margin of 47.92% is 990.2% higher than the 4.40% industry average.
For the fiscal second quarter that ended July 1, 2023, WINA’s total revenue increased 6.8% year-over-year to $20.36 million, while its income from operations grew 7.2% from the year-ago value to $13.25 million.
Moreover, the company’s net income and earnings per share stood at $10.37 million and $2.85, up 14.9% and 12.2% from the prior-year quarter, respectively.
WINA’s revenue has grown at CAGRs of 6.7% and 2.9% over the past three and five years, respectively. While its EBIT and EPS have improved at CAGRs of 10.2% and 13.7% over the past three years, respectively.
Over the past year, WINA’s shares have surged 74.7% to close the last trading session at $377.82.
WINA’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to Buy in our proprietary rating system.
It has an A grade for Quality and a B for Stability and Sentiment. Within the same industry, it is ranked #13. Click here to see the other ratings of WINA for Growth, Value, and Momentum.
Stock #1: The ODP Corporation (ODP)
ODP provides business services and supplies, products, and digital workplace technology solutions for small, medium, and enterprise businesses in the United States, Puerto Rico, and the U.S. Virgin Islands. The company operates through four divisions: ODP Business Solutions; Office Depot; Veyer; and Varis.
On September 12, Office Depot, an ODP division, unveiled a fresh podcast series titled "Imagine Success." This podcast series is currently accessible on the company’s website and major podcast platforms such as Spotify and Apple Podcasts.
"Imagine Success" will feature insightful discussions aimed at motivating entrepreneurs and offering valuable guidance across the diverse phases of a business's evolution, from embarking on the entrepreneurial journey and establishing a brand to pinpointing funding sources, overcoming obstacles, and more.
The aim is to be a resource and partner for small business owners, offering them not only products and services but also knowledge and inspiration through the podcast to help them succeed in their ventures.
On April 26, ODP announced an expansion of its partnership with Microsoft. By incorporating Microsoft Azure OpenAI Service advanced artificial intelligence technology, ODP aims to enhance the customer experience, optimize operational processes, and pursue growth opportunities more effectively.
The stock’s trailing-12-month ROCE of 15.71% is 40.6% higher than the 11.17% industry average. Its trailing-12-month asset turnover ratio of 1.97x is 97.1% higher than the industry average of 1.00x. Furthermore, ODP’s trailing-12-month cash per share of $8.77 is 264.9% higher than the $2.40 industry average.
For the fiscal second quarter, which ended on July 1, 2023, ODP’s sales amounted to $1.91 billion, while its operating income grew 64.3% from the year-ago value to $46 million. The company’s net income and EPS came in at $34 million and $0.87, up 25.9% and 123.1% from the prior-year quarter, respectively.
Analysts expect ODP’s EPS for the fiscal third quarter (ending September 2023) to increase 4.5% year-over-year to $1.55. While its revenue for the ongoing quarter is expected to be $2.04 billion. The company has an impressive surprise history, surpassing its revenue estimates in three of the trailing four quarters.
Additionally, ODP’s net income and EPS have increased at CAGRs of 14.3% and 20.1% over the past five years, respectively. The stock has gained 28.9% over the past year to close the last trading session at $46.89.
It is no surprise that ODP has an overall rating of B, equating to Buy in our proprietary rating system. It has an A grade for Value and a B for Quality. Out of 42 stocks in the same industry, it is ranked #5.
In addition to the POWR Ratings we’ve stated above, we also have ODP’s ratings for Growth, Momentum, Stability, and Sentiment. Get all ODP ratings here.
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ODP shares were trading at $47.10 per share on Tuesday morning, up $0.21 (+0.45%). Year-to-date, ODP has gained 3.43%, versus a 16.18% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.
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