In this piece, I evaluated two specialty retailer stocks, GameStop Corp. (GME) and Torrid Holdings Inc. (CURV), to determine which is a better investment. Based on the fundamental comparison of these stocks, I believe CURV is the better buy for the reasons explained throughout this article.
Inflation remained stubbornly high in April. The Commerce Department reported that the core personal consumption expenditures (PCE) price index, which measures a variety of goods and services and adjusts for changes in consumer behavior, grew 0.4% for the month and 4.7% from a year ago, higher than economists’ estimates of 0.3% and 4.6%, respectively.
Despite economic headwinds, including persistent inflation and high borrowing costs, consumer spending held up well as personal income accelerated 0.4% in April, higher than 0.3% in March. Consumer spending, which accounts for more than two-thirds of US economic activity, climbed 0.8% after gaining 0.1% in March and exceeded forecasters’ expectations.
Amid growing consumer spending, increasing disposable income, and evolving consumer preferences, the specialty retailer industry is expected to witness sustained growth in the foreseeable future. Moreover, many retailers continue to rapidly accelerate their shift to e-commerce to adjust to changing customer preferences.
Retail business owners increasingly leverage technology to transform the customer experience by blending physical and online retail. According to a report by Growth Market Reports, the global specialty retailers market is projected to reach $42.73 trillion by 2031, growing at a 4% CAGR.
GME is a clear winner in one-month price performance, with 19.1% returns compared to CURV’s 42.4% decline. GME has gained 30% over the past three months, while CURV plunged 22.1%. Also, GME’s 31.7% gains year-to-date are higher than CURV’s decline of 27.4%.
However, here are the reasons why I think CURV could perform better in the near term:
Latest Developments
On June 1, 2023, GME and Telos Foundation, a non-profit crypto and blockchain company, announced a strategic partnership. Under the deal, Telos’ blockchain will get access to mainstream gaming distribution via GME’s upcoming Web3 game launcher, GameStop Playr.
This collaboration signifies a meaningful opportunity for both companies to expand the global GameFi ecosystem and bring Web3 gaming to mainstream users. It should extend GME’s market reach and boost its revenue streams.
On December 15, 2022, CURV announced a resale program with thredUP (TDUP), one of the largest online resale platforms for women’s and kids’ apparel, shoes, and accessories. As the first plus-sized brand to leverage thredUP’s Resale-as-a-Service (RaaS) platform, CURV is a leader in its industry, making secondhand goods available to more customers. This should bode well for the company.
Recent Financial Results
GME’s net sales decreased 1.4% year-over-year to $5.93 billion in the fiscal year that ended January 28, 2023. Its gross profit grew 1.8% from the previous year to $1.37 billion. The company reported an adjusted operating loss of $308 million for the year. Also, its adjusted net income and adjusted EPS came in at $309.50 and $1.02, respectively.
CURV’s net sales decreased 0.7% year-over-year to $1.29 billion for the fiscal year that ended January 28, 2023. Its gross profit was $459.54 million, down 14.5% year-over-year. Its income from operations grew 123.9% from the prior year to $101.63 million. Also, the company’s net income was $50.21 million or $0.48 per share, compared to a loss of $29.94 million or $0.27 a share in the previous year.
Expected Financial Performance
Analysts expect GME’s revenue and EPS for the fiscal year (ending January 2025) to decrease 4.8% and 0.3% year-over-year to $5.62 billion and $0.35, respectively. In addition, the company’s EPS is expected to decline 48.2% per annum over the next five years.
For the fiscal year 202, CURV’s revenue and EPS are expected to increase 3.2% and 18.8% year-over-year to $326.42 billion and $0.57, respectively. Moreover, analysts expect the company’s EPS to grow 16% per annum over the next five years.
Valuation
In terms of trailing-12-month Price/Sales, CURV is currently trading at 0.17x, 86.4% lower than GME, which is trading at 1.25x. CURV’s trailing-12-month EV/Sales multiple of 0.59 compared to GME’s 1.13. Likewise, CURV’s trailing-12-month Price/Cash Flow of 4.19x is significantly lower than GME's 68.40x.
Profitability
GME’s trailing-12-month revenue is 4.6 times what CURV generates. However, CURV is more profitable, with a trailing-12-month gross profit margin and EBITDA margin of 35.67% and 10.58% compared to GME’s 23.15% and negative 4.05%, respectively. CURV’s trailing-12-month net income margin of 3.90% is higher than GME’s negative 5.28%.
Furthermore, CURV’s trailing-12-month ROA and ROTC of 12.43% and 19.49% compare with GME’s negative 8.81% and negative 9.00%, respectively.
POWR Ratings
GME has an overall rating of C, which equates to a Neutral in our proprietary POWR Ratings system. Conversely, CURV has an overall rating of B, which translates to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. GME has a D grade for Value, consistent with its high valuation. GME has a forward Price/Sales multiple of 1.25, 52.6% higher than the industry average of 0.82. CURV, on the other hand, has an A grade for Value, in sync with its lower-than-industry valuation. CURV’s forward EV/Sales of 0.17x is 79% lower than the industry average of 0.82x.
In addition, GME has a D grade for Sentiment. The Sentiment grade is justified by its poor analyst expectations. On the contrary, CURV has a grade of B, consistent with its optimistic analyst estimates.
Also, GME has a C grade for Quality, in sync with its mixed profitability. GME’s 4.14% trailing-12-month levered FCF margin is 23.9% higher than the 3.34% industry average. However, its trailing-12-month EBIT margin of negative 5.09% compares with the industry average of 7.36%.
On the other hand, CURV has a B grade for Quality, consistent with its relatively higher profitability. CEI has a trailing-12-month EBIT margin and a levered FCF margin of 7.89% and 5.23% compared to the industry averages of 7.36% and 3.34%, respectively.
Of the 44 stocks in the Specialty Retailers industry, GME is ranked #34, while CURV is ranked #5.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, and Stability. Click here to view GME Ratings. Get all CURV ratings here.
The Winner
Despite several economic headwinds, the specialty retailers industry is positioned for considerable growth this year, thanks to robust consumer spending, higher disposable income, and changing consumers’ buying behavior. Moreover, cutting-edge retailers are using technology to create a better customer experience. Thus, GME and CURV should benefit significantly from the industry tailwinds.
However, GME’s stretched valuation and unfavorable analyst estimates make its competitor CURV the better buy now.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Specialty Retailers industry here.
What To Do Next?
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GME shares were trading at $24.91 per share on Tuesday morning, up $0.60 (+2.47%). Year-to-date, GME has gained 34.94%, versus a 12.23% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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