Buy or Sell: Evaluating 3 Specialty Retailer Stocks

The specialty retail industry is experiencing expansion, fueled by rising retail sales and enhanced consumer confidence. An extensive assessment indicates that specialty retail stocks, The ODP Corporation (ODP) and Winmark Corporation (WINA), could be wise portfolio additions now. In contrast, I believe GameStop Corp. (GME) could be best avoided now.

The Consumer Price Index (CPI) for June marked the smallest rise in more than two years, recording a 0.2% uptick month-over-month and a 3% increase year-over-year. This was below Dow Jones forecasts of 0.3% and 3.1%, respectively. Moreover, July’s CPI is forecasted to show a 0.2% month-over-month increase and a 3.3% year-over-year rise.

Data from the Bureau of Labor Statistics unveiled long-term economic strength, with the U.S. economy adding 187,000 jobs in July. Monthly wages rose 0.4%, translating to a 4.4% year-over-year rise, surpassing the projected figures.

Reflective of an enduring economy, American retail spending consistently grew for the third consecutive month in June. This continued spending, bolstered by easing inflation, steady employment, and consumers’ resilience despite increased interest rates and economic uncertainty, resulted in a 0.2% increase in retail spending for June. When compared to last year, overall retail sales grew by 1.5%.

Retail sales form a substantial portion of broader consumer spending, contributing approximately two-thirds of the total economic output and prominently influencing the U.S. economy. Reports from the Bureau of Economic Analysis suggest that personal consumption expenditures (PCE), accounting for roughly 68% of GDP, escalated in June, reaching a record annualized rate of $18.38 trillion.

Moreover, U.S. consumers exhibited confidence about the current economic condition and upcoming prospects. Supporting this sentiment, the Conference Board’s monthly Consumer Confidence Index climbed to 117 in July, a rise from 110.1 in the prior month and its highest level in two years.

Additional factors supporting the demand for specialty retail goods include consumers’ increased impulsive buying, enhanced disposable income, urbanization growth, and the rising prominence of international brands. Moreover, implementing digital retailing, designed to provide a seamless shopping experience, is also anticipated to spur the market further.

The global specialty retailer market is expected to reach $42.7 billion by 2031, growing at a CAGR of 4%.

The growing investment interest in retail stocks adds credence to the positive trend within the retail industry. The SPDR S&P Retail ETF (XRT) has gained 7.5% over the past three months.

Given this backdrop, fundamentally strong specialty retail stocks ODP and WINA look well-positioned to soar and could be worth investing in. However, it could be wise to avoid GME.

Stocks to Buy:

The ODP Corporation (ODP)

ODP provides business services, 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 April 26, ODP expanded its collaboration with Microsoft Corporation (MSFT) to leverage Microsoft Azure OpenAI Service advanced artificial intelligence technology to enhance customer experience, streamline internal operations, and pursue growth opportunities more efficiently. This partnership should help ODP to improve the speed, reliability, and security of its online services and capabilities, reduce costs and boost revenues.

ODP’s EBITDA and EBIT grew at 3.5% and 11.1% CAGRs over the past ten years, respectively. Moreover, its levered free cash flow grew at 10.1% CAGR over the past ten years.

ODP’s trailing-12-month ROCE, ROTC, and ROTA of 14.77%, 7.26%, and 4.53% are 43.3%, 22%, and 24.2% higher than the industry averages of 10.31%, 5.95%, and 3.65%, respectively. Likewise, its trailing-12-month asset turnover ratio of 1.97x is 97% higher than the industry average of 1x.

ODP’s sales amounted to $1.91 billion in the fiscal second quarter that ended July 1, 2023, while its gross profit stood at $415 million. Its adjusted operating income came at $53 million. Its adjusted net income remained consistent with the prior-year value of $39 million, while adjusted EPS from continuing operations increased 25.3% year-over-year to $0.99.

The company’s adjusted EBITDA amounted to $86 million. As of July 1, 2023, ODP’s total current liabilities were $1.78 billion, compared to $1.86 billion as of December 31, 2022.

Analysts expect ODP’s EPS of $1.58 for the fiscal third quarter ending September 2023 to increase 6.6% year-over-year, while its revenue for the same quarter is expected to be $2.11 billion. The company has an impressive earnings surprise history, surpassing the EPS estimates in three of the trailing four quarters.

ODP’s shares have gained 34.4% over the past year to close the last trading session at $49.88. Over the past three months, it gained 18.9%.

ODP’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

It has an A grade for Growth and a B for Value and Quality. Among the 43 stocks in the Specialty Retailers industry, it is ranked #3.

Click here to see the other ratings of ODP for Momentum, Stability, and Sentiment.

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 through two segments: Franchising and Leasing. As of July 1, 2023, the company had 1,303 franchises operating under Plato’s Closet, Once Upon A Child, Play It Again Sports, Style Encore, and Music Go Round brands.

On July 19, 2023, WINA announced the quarterly dividend of $0.80 per share, payable to the shareholders on September 1. WINA pays a $3.20 per share dividend annually, translating to a 0.88% yield on the current share price.

Its four-year average dividend yield is 2.16%. The company’s dividend payouts have grown at a CAGR of 53.6% over the past three years and 43.3% over the past five years.

WINA’s EBITDA has grown at 10.2% and 5.7% CAGRs over the past three and five years, respectively. Moreover, its EBIT and net income grew at 5.5% and 7.6% CAGRs over the past five years, respectively.

WINA’s trailing-12-month net income margin of 47.92% is significantly higher than the industry average of 4.18%. Likewise, its trailing-12-month ROTC and ROTA of 152.78% and 83.64% are significantly higher than the industry averages of 5.95% and 3.65%, respectively.

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% year-over-year to $13.25 million. Its net income and earnings per share stood at $10.37 million and $2.85, up 14.9% and 12.2% from the year-ago quarter, respectively.

Furthermore, for the six months that ended July 1, 2023, WINA’s cash, cash equivalents, and restricted cash increased 269.9% year-over-year to $32.38 million. As of July 1, 2023, WINA’s total current assets stood at $35.85 million, compared to $18.10 million as of December 31, 2022.

Over the past year, the stock has gained 65.1% to close the last trading session at $366.09. It gained 30.6% over the past six months.

WINA’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.

It has an A grade for Quality and a B for Stability and Sentiment. It is ranked #11 in the same industry.

Beyond what is stated above, we have also given WINA grades for Growth, Value, and Momentum. Get access to all the WINA ratings here.

Stock to Avoid:

GameStop Corp. (GME)

GME is a specialty retailer that offers games and entertainment products through stores and e-commerce platforms in the United States, Canada, Australia, and Europe.

The company projected the cryptocurrency and non-fungible tokens (NFTs) wallet, introduced in May 2022, to provide a financial boost. Nevertheless, owing to persistent regulatory ambiguity and discomfort surrounding digital assets among corporates, the company has strategically decided to discontinue its crypto wallet operation.

Its forward EV/EBITDA of 504.92x is significantly higher than the industry average of 9.96x. Its forward Price/Sales multiple of 1.11 is 25.8% higher than the industry average of 0.88.

GME’s trailing-12-month gross profit margin of 23.52% is 33.6% lower than the industry average of 35.41%. Likewise, its trailing-12-month ROCE, ROTC, and ROTA are negative 15.11%, 5.41%, and 6.70% compared to the industry averages of 10.31%, 5.95%, and 3.65%, respectively.

During the fiscal first quarter that ended April 29, 2023, GME’s net sales decreased 10.3% year-over-year to $1.24 billion, while its gross profit declined 3.8% from the year-ago value to $287.30 million. Moreover, the company registered a net loss and loss per share of $50.50 million and $0.17 during the period.

In addition, GME’s revenue for the fiscal year ending January 2024 is expected to decrease 3.7% year-over-year to $5.71 billion. Streets expect the company to report a loss per share of $0.26 for the same year. Furthermore, GME failed to surpass its revenue estimates in three of the trailing four quarters, which is disappointing.

Shares of GME have plunged 12.2% over the past month to close its last trading session closing at $22.70. Over the past year, the stock declined 50.6%.

GME’s weak fundamentals are reflected in its POWR Ratings. It has an overall rating of D, equating to Sell in our proprietary rating system.

It has a D grade for Value, Stability, and Sentiment. GME is ranked #40 within the same industry.

Click here to see GME’s Growth, Momentum, and Quality ratings.

43 Year Investment Pro Shares Top Picks

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GME shares rose $0.27 (+1.35%) in premarket trading Thursday. Year-to-date, GME has gained 8.45%, versus a 18.04% rise in the benchmark S&P 500 index during the same period.

The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.

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