Rising disposable income, retailers’ increased focus on enhancing personalized customer experience, and the integration of advanced technology are poised to keep the retail sector resilient in the foreseeable future.
Specialty retailer Ulta Beauty, Inc. (ULTA) and sporting goods retailer DICK'S Sporting Goods, Inc. (DKS) are scheduled to report their fourth-quarter results on March 14, 2024. Street expects ULTA’s revenue and EPS for the fiscal fourth quarter of 2023 (ended January 2024) to be $3.53 billion and $7.54, up 9.3% and 12.8% year-over-year, respectively. Similarly, DKS’ revenue and EPS for the same quarter are expected to increase 5.4% and 14.8% year-over-year to $3.79 billion and $3.36, respectively.
Given this backdrop, retail stocks ULTA and DKS should be kept on one's watchlist for better entry opportunities. But first, let’s take a quick look at the industry landscape before delving deeper into the fundamentals of the two stocks.
With the transition to e-commerce over the years, the retail industry has grown significantly, helping retailers reach their potential customers globally and access a vast online marketplace, allowing retailers to diversify their customer base and become independent of local markets. Additionally, retailers have the facility to operate their businesses 24/7 without the limitations of traditional store hours, while consumers can shop whenever they want at their convenience.
The CNBC/NRF Retail Monitor, derived from actual credit card spending data from Affinity Solutions, rose 1.06% month-over-month in February. Sporting goods, hobby, music, and bookstores were up 2.29% month-over-month seasonally adjusted and up 13.67% year-over-year.
The specialty retailers stand to gain considerably from rising consumer spending, easing inflation, increased disposable income, and the presence of enticing credit alternatives. Anticipating a shift in monetary policy, with predictions of rate reductions by the Federal Reserve, specialty retailers maintain a promising position for expansion. The global specialty retailers market is expected to be worth $42.7 billion by 2031, growing at a CAGR of 4%.
Moreover, the heightened focus on physical and mental health fueled a strong comeback in the athletic industry post-pandemic, boosting participation in outdoor activities like camping, fishing, surfing, skiing, golfing, and skateboarding. This should keep the recreation industry and the sports retail sector buoyed. Consequently, the global sports equipment and apparel market is estimated to reach $1.03 trillion by 2030, growing at a CAGR of 7.4%.
Furthermore, the integration of AI into retail operations has enhanced customer experiences by providing them with personalized products, along with the optimization of search engines and implementation of auto-replenishment systems. AI is expected to substantially impact operations with product recommendations, inventory management, order fulfillment, and customer service interactions. Besides focusing on cost-cutting, retailers are considering to invest in new AI capabilities in 2024.
With these favorable trends in mind, let's delve into the fundamentals of the two retail sector stock picks.
Stocks to Hold:
Ulta Beauty, Inc. (ULTA)
ULTA is a retailer of beauty products offering cosmetics, fragrance, haircare and skincare products, and related accessories and services in the U.S.
During the third quarter of 2023, ULTA repurchased 686,689 shares of its common stock for $281.50 million. During the first nine months of fiscal year 2023, the company repurchased 1.80 million shares of its common stock for $840.50 million. As of October 28, 2023, $259.40 million remained available under the $2 billion share repurchase program announced in March 2022.
ULTA’s trailing-12-month EBIT and net income margins of 14.78% and 11.37% are 95.4% and 140.3% higher than the industry averages of 7.57% and 4.73%, respectively. However, the stock’s cash per share of $2.50 is 3.4% lower than the industry average of $2.59.
During the fiscal third quarter that ended October 28, 2023, ULTA’s net sales and gross profit increased 6.4% and 3% year-over-year to $2.49 billion and $992.07 million, respectively.
Furthermore, the company’s net income and net income per common share stood at $249.48 million and $5.07, respectively. As of October 28, 2023, ULTA’s total current assets amounted to $2.79 billion, compared to $2.75 billion as of October 29, 2022.
Street expects ULTA’s revenue and EPS for the fiscal year (ended January 2024) to increase 9.5% and 6.4% year-over-year to $11.17 billion and $25.55, respectively. The company surpassed consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.
The stock has gained 34.1% over the past six months to close the last trading session at $555.57. Over the past nine months, it has gained 30.8%.
ULTA’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall C rating, equating to Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
The stock has a C grade for Stability and Sentiment. Within the C-rated Specialty Retailers industry, ULTA is ranked #27 out of 41 stocks.
To see additional POWR Ratings for Growth, Value, Momentum, and Quality for ULTA, click here.
DICK'S Sporting Goods, Inc. (DKS)
DKS is a sporting goods retailer primarily in the U.S. The company provides hardlines, including sporting goods equipment, fitness equipment, golf equipment, and hunting and fishing gear products; apparel; and footwear and accessories.
On February 28, DKS released its new e-commerce ad campaign titled “Click On DICKS.com,” starring actors Will Arnett and Kathryn Hahn, and produced in partnership with creative agency Juxtapose Studio.
The campaign features the seamless, hassle-free experience of shopping on DICKS.com, and highlights DKS as the ultimate online shopping destination for athletic apparel, footwear and sporting goods equipment. With this campaign, DKS reminded its customers that the exceptional service, unique offerings, and wide-range assortment found in its brick-and-mortar stores are also available online at any time.
On January 24, Maxfli, a distinguished golf brand with a century-long legacy in performance and quality, announced its exclusive golf ball endorsement agreement with professional golfer Lexi Thompson. The Maxfli Tour ball is part of the Maxfli Tour Series, which is sold exclusively at DKS and Golf Galaxy.
This partnership signifies a major milestone as Thompson commits to playing and endorsing the Maxfli Tour Series golf ball throughout the 2024 season, which may increase the sales of DKS.
DKS pays an annual dividend of $4 per share, which translates to a dividend yield of 2.22% on the current share price. Its four-year average yield is 3.44%. DKS’ dividend payments have grown at CAGRs of 47.4% and 34.8% over the past three and five years, respectively.
DKS’ trailing-12-month cash from operations of $1.65 billion is 500.6% higher than the industry average of $274.87 million. However, the stock’s gross profit margin of 34.41% is 3.6% lower than the industry average of 35.71%.
For the fiscal third quarter that ended October 28, 2023, DKS’ net sales increased 2.8% year-over-year to $3.04 billion. For the same quarter, the company’s non-GAAP net income and non-GAAP earnings per share stood at $239.95 million and $2.85, up 5% and 9.6% from the prior-year quarter, respectively.
For the nine months that ended October 28, 2023, its cash and cash equivalents at end of period stood at $1.41 billion. As of October 28, 2023, DKS’ total current assets amounted to $4.94 billion, compared to $4.99 billion as of October 29, 2022.
Analysts expect DKS’ revenue and EPS for the fiscal year (ended January 2024) to increase 4.3% and 3.3% year-over-year to $12.90 billion and $12.43, respectively. Moreover, the company surpassed consensus revenue and EPS estimates in three of the trailing four quarters.
For the fiscal first quarter ending April 2024, street expects the company’s revenue to increase 2.2% year-over-year to $2.90 billion. However, its EPS is expected to decline 10.2% year-over-year to $3.05 for the same quarter.
The stock has gained 64.8% over the past six months to close the last trading session at $182.25. Over the past nine months, it has gained 34.6%.
DKS’ mixed prospects are reflected in its POWR Ratings. The stock has an overall C rating, equating to Neutral in our proprietary rating system.
DKS has a C grade for Growth, Value, Stability, and Sentiment. Within the Athletics & Recreation industry, it is ranked #10 out of 34 stocks.
Beyond what we’ve stated above, we have also rated the stock for Momentum and Quality. Get all ratings of DKS here.
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ULTA shares were unchanged in premarket trading Wednesday. Year-to-date, ULTA has gained 13.38%, versus a 8.72% rise in the benchmark S&P 500 index during the same period.
About the Author: Neha Panjwani
From her school days, Neha harbored a profound fascination for finance, a passion that steered her toward a career as an investment analyst following the completion of her bachelor's degree in commerce. Currently enrolled in the CFA program, Neha is dedicated to further enriching her comprehension of investment fundamentals. Neha's primary objective is to aid retail investors in discerning optimal investment opportunities by diligently evaluating crucial aspects of financial instruments, with a primary focus on stocks and ETFs. Her commitment lies in empowering individuals to make informed and strategic investment decisions in the dynamic world of finance.
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