Over the past year, the retail sector has exhibited strong resilience on the backs of solid consumer spending. Moreover, the latest economic reports have propped up the idea that a soft landing is possible and in motion.

Given this backdrop, let’s determine whether Best Buy Co., Inc. (BBY) and Murphy USA Inc. (MUSA) are quality stocks to own. Before analyzing these stocks, let’s discuss what’s happening in the retail sector.

Americans have been feeling upbeat about the economy as inflation slows down. The Federal Reserve’s preferred inflation gauge Personal Consumption Expenditures (PCE) price index, eased for the second-consecutive month, stepping back from May’s 3.8% increase to 3% year-over-year in June.

Rejoiced by the deceleration in inflation, consumer sentiment rose 11% in July, reaching its highest level since October 2021. The Commerce Department reported that consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.5% in June after gaining 0.2% in May, thereby boosting the economy’s growth prospects for the second half of 2023.

Consumers continued to spend, as personal incomes ticked up 0.4% in June. With increasing consumer demand, higher disposable income, and changing consumer preferences, global specialty retailers will likely hit $42.73 trillion by 2031, exhibiting a CAGR of 4%.

Total retail sales worldwide are expected at $29.3 trillion in 2023, indicating a 3.9% increase from the previous year. The industry’s annual growth rate is expected to average 3.8% from 2023 to 2026. By 2026, total retail sales worldwide are predicted to hit $32.8 trillion

Considering the industry’s rosy prospects, investors could invest in quality retail stocks BBY and MUSA that are well-positioned to benefit from the industry’s tailwinds. To that end, let us evaluate the fundamentals of the featured stocks in detail.

Best Buy Co., Inc. (BBY)

BBY engages in the retail of consumer technology products and services through Domestic and International segments. Its stores provide computing and mobile phone products, networking products, tablets covering e-readers, smartwatches, and consumer electronics consisting of digital imaging, health and fitness products, and smart home products.

On July 6, the company paid its shareholders a regular quarterly dividend of $0.92 per common share. BBY’s four-year average dividend yield is 3.04%, and its current dividend of $3.68 translates to a 4.45% yield on prevailing prices.

Its dividend payouts have grown at a 19.7% CAGR over the past three years and a 17.9% CAGR over the past five years. Also, it has a record of 12 years of consecutive dividend growth.

In terms of forward EV/Sales, BBY is trading at 0.48x, 60.1% lower than the industry average of 1.21x. The stock’s forward Price/Sales of 0.42x is 53.9% lower than the industry average of 0.91x.

In the fiscal first quarter that ended April 29, 2023, BBY’s net sales amounted to $9.47 billion. Its operating income stood at $311 million, while its net earnings came in at $244 million and $1.11 per share, respectively. During the same period, its cash and cash equivalents increased 60.9% year-over-year to $1.03 billion, while its long-term debt declined marginally from the prior-year period to $1.15 billion.

The consensus EPS estimate of $6.84 for the fiscal year 2024 represents a 12.3% increase from the prior-year period. The consensus revenue estimate of $44.45 billion for the next year indicates a marginal improvement year-over-year. The company has an excellent earning surprise history, surpassing the EPS estimates in each of the trailing four quarters.

Its revenue has increased at marginal CAGRs over the past three and five years, while its EPS has grown at a 3.1% CAGR over the past three years.

BBY’s trailing- 12-month ROCE, ROTC, and ROTA of 47.55%, 16.58%, and 9% are comparatively higher than the industry averages of 10.57%, 6.05%, and 3.72%, respectively.

Over the past nine months, the stock has gained 23.1% to close the last trading session at $81.24.

BBY’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

It has a B grade for Value and Quality. In the 43-stock Specialty Retailers industry, it is ranked #15. To see the other ratings of BBY for Growth, Momentum, Stability, and Sentiment, click here.

Murphy USA Inc. (MUSA)

MUSA is engaged in marketing retail motor fuel products and merchandise through a chain of retail stores. The company operates retail stores under three brands: Murphy USA, Murphy Express, and QuickChek.

On May 4, MUSA’s Board of Directors declared an increase of 3% in its quarterly dividend to $0.38 per share of common stock, payable on June 1, 2023. The company’s annual dividend of $1.52 per share translates to a 0.50% yield, while its four-year average yield is 0.32%.

In the same month, the board authorized a new share repurchase program of up to $1.5 billion to begin upon completion of the current $1 billion authorization and to be executed by December 31, 2028. The new approval reaffirms MUSA’s commitment to supplement organic growth initiatives with shareholder distributions, including its dividend growth plan, to maximize value creation over time.

In terms of forward EV/Sales, MUSA is trading at 0.40x, 67.1% lower than the industry average of 1.21x. The stock’s forward EV/EBIT multiple of 12.19 is 13.4% lower than the industry average of 14.08. Also, its forward Price/Sales ratio of 0.30x compares to the industry average of 0.91x.

During the second quarter (ended June 30, 2023), MUSA’s total operating revenues amounted to $5.58 billion, while its merchandise sales increased 5.5% year-over-year to $1.05 billion. The company’s net income and earnings per common share came in at $132.80 million and $6.02, respectively. Also, its adjusted EBITDA stood at $257.10 million in the same period.

As of March 31, 2023, its cash and cash equivalents of $92.90 million increased 53.5% from $60.50 million for the period that ended December 31, 2022.

Street expects MUSA’s revenue to increase 3.3% year-over-year in the fourth quarter (ending December 31) to $5.54 billion, while its EPS is expected to amount to $5.20 in the same period.

Further, the EPS and revenue are projected to increase marginally year-over-year to reach $22.62 and $22.05 billion in the fiscal year 2024. Additionally, it surpassed the revenue estimates in three of the trailing four quarters.

Over the past three years, its revenue and net income have grown at CAGRs of 20.4% and 37.9%, respectively. Likewise, its EPS has improved at a CAGR of 52.5% over the same period.

The stock’s trailing-12-month ROCE, ROTC, and ROTA of 83.11%, 18.91%, and 15.22% compared to the industry averages of 10.57%, 6.05%, and 3.72%, respectively.

Shares of MUSA have gained 14.7% over the past six months to close the last trading session at $299.20.

It is no surprise that MUSA has an overall rating of B, which translates to Buy in our proprietary rating system. It also has a B grade for Value and Quality. Within the same industry, it is ranked #10 among 43 stocks.

Beyond what we’ve stated above, we’ve also rated MUSA for Growth, Momentum, Stability, and Sentiment. Get all MUSA ratings here.

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BBY shares were trading at $81.22 per share on Thursday morning, down $0.02 (-0.02%). Year-to-date, BBY has gained 3.70%, versus a 18.39% rise in the benchmark S&P 500 index during the same period.

Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.

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