Retail sales were muted last year as consumers held back on spending due to high inflation, the Federal Reserve’s aggressive interest rate hikes, and fears of an impending recession. However, retail sales are expected to rise this year as consumer spending remains robust amid cooling inflation and strong job growth.
To that end, it could be wise to add fundamentally strong retail stocks Murphy USA Inc. (MUSA), The ODP Corporation (ODP), and Sally Beauty Holdings, Inc. (SBH) to one’s portfolio.
Before diving deeper into the fundamentals of these stocks, let’s discuss why the retail industry is well-positioned for growth.
Consumer spending rose 0.1% in May, while U.S. retail sales increased 0.3% in May. Retail sales and consumer spending will likely remain robust thanks to easing inflation and a strong job market.
Furthermore, the Conference Board’s Consumer confidence index rose to 109.7 in June, up from 102.5 in May. The Conference Board’s Chief Economist Dana Peterson said, “Consumer confidence improved in June to its highest level since January 2022, reflecting improved current conditions and a pop in expectations.”
Retailers are also expected to benefit from increasing consumer demand, higher disposable incomes, and changing consumer preferences. According to NRF, retail sales in 2023 will grow between 4% and 6% year-over-year to between $5.13 trillion and $5.23 trillion.
NRF President and CEO Matthew Shay said, “In just the last three years, the retail industry has experienced growth that would normally take almost a decade by pre-pandemic standards. While we expect growth to moderate in the year ahead, it will remain positive as retail sales stabilize to more historical levels.”
Let's take a closer look at their fundamentals.
Murphy USA Inc. (MUSA)
MUSA engages in the marketing of retail motor fuel products and convenience merchandise. The company operates retail stores under the Murphy USA, Murphy Express, and QuickChek brands. It operates retail gasoline stores in the Southeast, Southwest, and Midwest United States.
On May 2, 2023, MUSA announced that its Board of Directors approved a new share repurchase authorization of $1.5 billion. It will begin after the completion of the current $1 billion authorization and will be completed by December 31, 2028. This shows the company's dedication to enhancing shareholder value through organic growth initiatives and dividend growth plans.
President and CEO Andrew Clyde, MUSA, said, "We are increasingly confident in the future of Murphy USA given our exceptional operating performance, accelerating organic growth profile, and ongoing business improvement initiatives.”
“This timeframe provides management added flexibility over a 5-year window to fully fund a growing store pipeline and allocate increasing free cash flow to the highest and best return investments, prioritizing share repurchase given our view of the future potential of Murphy USA,” he added.
Its 18.91% trailing-12-month Return on Total Capital is 210.2% higher than the 6.10% industry average. Its 15.22% trailing-12-month Return on Total Assets is 317.8% higher than the 3.64% industry average. Likewise, its 5.09x trailing-12-month asset turnover ratio is 407.4% higher than the industry average of 1x.
For the fiscal first quarter ended March 31, 2023, MUSA’s net income came in at $106.30 million. The company’s total operating revenue came in at $5.08 billion. Also, its adjusted EBITDA came in at $220.20 million. Also, its EPS came in at $4.80.
Street expects MUSA’s revenue for the quarter ending December 31, 2023, to increase 3.8% year-over-year to $5.57 billion. Its EPS for fiscal 2024 is expected to increase 4% year-over-year to $22.28. It surpassed the Street EPS estimates in three of the four trailing quarters. Over the past six months, the stock has gained 18.5% to close the last trading session at $311.68.
MUSA’s POWR Ratings reflect strong prospects. The stock has an overall rating of B, translating to a Buy in our proprietary rating system. The POWR ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #11 out of 42 stocks in the Specialty Retailers industry. It has a B grade for Value and Quality. Click here to see MUSA’s Growth, Momentum, Stability, and Sentiment rating.
The ODP Corporation (ODP)
ODP provides business services, supplies, products, and digital workplace technology solutions for small, medium, and enterprise businesses. The company operates through four divisions: ODP Business Solutions, Office Depot, Veyer, and Varis.
On April 26, 2023, ODP Corporation announced the expansion of its relationship with Microsoft Corporation (MSFT), leveraging advanced AI technology from Microsoft Azure OpenAI Service. This expansion aims to enhance customer experience, drive efficiencies, and pursue growth opportunities. By utilizing Microsoft Azure OpenAI, including ChatGPT, ODP aims to improve customer experience, streamline operations, and enhance growth potential.
Gerry Smith, Chief Executive Officer at ODP, said, “This technology will enable continued transformation in our business, driving additional operational efficiencies consistent with our low-cost business model, and positioning us to deliver greater value to customers while more effectively pursuing growth opportunities.”
“Our relationship with Microsoft positions ODP to be at the forefront of innovation, enhancing our digital capabilities and creating a sustainable competitive advantage for the future,” he added.
Its 14.77% trailing-12-month Return on Common Equity is 50.1% higher than the 9.84% industry average. Likewise, its 7.26% trailing-12-month Return on Total Capital is 19.2% higher than the 6.10% industry average. Its 1.97x trailing-12-month asset turnover ratio is 95.8% higher than the 1x industry average.
ODP’s sales for the first quarter ended April 1, 2023, came in at $2.11 billion. Its adjusted EBITDA increased 4.8% year-over-year to $131 million. The company’s adjusted operating income rose 12.5% year-over-year to $99 million.
Its adjusted net income from continuing operations increased 17.2% year-over-year to $75 million. Also, its adjusted EPS from continuing operations came in at $1.78, representing an increase of 40.2% year-over-year.
Analysts expect ODP’s EPS for the quarter ending September 30, 2023, to increase 6.6% year-over-year to $1.58. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 54% to close the last trading session at $48.13.
ODP’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It has an A grade for Growth and a B for Value and Quality. It is ranked #2 in the same industry. To see the other ratings of ODP for Momentum, Stability, and Sentiment, click here.
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.
In terms of the trailing-12-month EBIT margin, SBH’s 9.31% is 28.1% higher than the 7.27% industry average. Its 50.63% trailing-12-month gross profit margin is 43.7% higher than the 35.24% industry average. Likewise, its 1.40x trailing-12-month asset turnover ratio is 39.8% higher than the industry average of 1x.
For the second quarter ended March 31, 2023, SBH’s total net sales increased 0.8% year-over-year to $918.71 million. Its non-GAAP net earnings came in at $44.55 million. The company’s adjusted EBITDA came in at $105.22 million. In addition, its adjusted EPS came in at $0.41.
For the quarter ending December 31, 2023, SBH’s EPS and revenue are expected to increase 9% and 1.6% year-over-year to $0.57 and $971.90 million, respectively. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past month, the stock has declined marginally to close the last trading session at $12.
SBH’s positive outlook is reflected in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.
It has a B grade for Value and Quality. It is ranked #10 out of 42 stocks in the Specialty Retailers industry. Click here to see SBH’s rating for Growth, Momentum, Stability, and Sentiment.
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MUSA shares were trading at $306.42 per share on Wednesday morning, down $5.26 (-1.69%). Year-to-date, MUSA has gained 9.92%, versus a 17.83% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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