Americans are feeling more optimistic about spending this summer due to more travel, additional holidays, and lower gas prices. Additionally, the Federal Reserve’s decision to not raise interest rates in June has also contributed to the positive outlook.
With inflation dropping to its lowest annual rate in more than two years in June, we suggest you take a look at three retail stocks The ODP Corporation (ODP), Yatsen Holding Limited (YSG), and Betterware de México, S.A.P.I. de C.V. (BWMX), with solid fundamentals and high profitability.
U.S. retail sales increased in May, suggesting consumer spending is holding up amid economic headwinds. The value of retail purchases rose 0.3% after a 0.4% gain in April, Commerce Department data showed.
Moreover, retail and food services sales increased 0.3% in May compared to April and a 1.6% increase compared to last year. Consumers are spending almost 4% more than last year (seasonally adjusted) on retail and food sales, excluding gasoline and automobiles.
Although given the swings in macroeconomic conditions and their effect on consumer behavior seems to be challenging for retailers, they tend to enjoy an inelastic demand as consumers do not pull back from spending on consumer staples and other necessary items such as household and personal products.
Total global retail sales worldwide in 2023 are expected to come in at $29.3 trillion, indicating a 3.9% annual increase, with the industry’s annual growth rate set to average 3.8% from 2023 to 2026. Further, the market is expected to reach $37.66 trillion in 2027, growing at a CAGR of 7.4%.
Considering the solid growth projections, investors could invest in quality retail stocks ODP, YSG, and BWMX that are well-positioned to ride out the market volatility. Let’s look at the above-mentioned stocks in detail:
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.
In terms of trailing-12-month ROCE and ROTA, ODP’s 14.77% and 4.53% are 50.1% and 24.3% higher than the industry averages of 9.84% and 3.64%, respectively. Likewise, its trailing-12-month asset turnover ratio of 1.97x is 95.8% higher than the industry average of 1x.
ODP’s sales amounted to $2.11 billion in the first quarter (ended April 1, 2023), while its non-GAAP operating income rose 12.5% from the year-ago value to $99 million. Its adjusted net income and EPS from continuing operations increased 17.2% and 40.1% from the prior-year quarter to $75 million and $1.78, respectively.
The company’s adjusted EBITDA amounted to $131 million, representing an increase of 4.8% year-over-year, while its non-GAAP free cash flow stood at $133 million, up significantly year-over-year.
Analysts expect ODP’s EPS of $1.58 for the third quarter (ending September 2023) to increase 6.6% year-over-year, while its revenue for the same period is expected to be $2.11 billion. The company has an impressive earnings surprise history, surpassing the EPS estimates in each of the trailing four quarters.
ODP’s shares have gained 53.9% over the past year 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 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 42 stocks in the Specialty Retailers industry, it is ranked #2. Click here to see the other ratings of ODP for Momentum, Stability, and Sentiment.
Yatsen Holding Limited (YSG)
YSG is a Chinese company based in Guangzhou that develops and sells beauty products under various brands, including Perfect Diary, Little Ondine, Pink Bear, Abby’s Choice, GalÃnic, DR.WU, Eve Lom, and EANTiM. The company offers various color cosmetics, skin care products, beauty tools and kits, and more.
YSG’s trailing-12-month levered FCF margin of 10.27% is 244.5% higher than the 2.98% industry average. Also, its trailing-12-month gross profit margin of 69.07% is 120.2% higher than the industry average of 31.36%.
In the fiscal first quarter that ended March 31, 2023, YSG’s total net revenue amounted to RMB765.39 million ($105.79 million). Its net income came in at RMB50.68 million ($7 million) compared to a net loss of RMB291.38 million ($40.28 million) in the same period last year.
The company’s net income per Class A and Class B ordinary shares amounted to RMB0.02 versus a loss per share of RMB0.12 in the prior-year quarter.
The consensus revenue estimate of $577.35 million for the current year (ending December 2023) represents an 8.3% increase from the prior year. It is expected to reach $660.77 million, reflecting a 14.5% improvement year-over-year. Additionally, it surpassed the revenue estimates in each of the trailing four quarters, which is impressive.
The stock has gained 5.9% over the past nine months to close the last trading session at $1.07.
YSG’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, translating to Buy in our proprietary rating system.
It has an A grade for Growth and a B for Value, Sentiment, and Quality. Within the same industry, it is ranked #3. To see additional POWR Ratings of YSG for Momentum and Stability, click here.
Betterware de México, S.A.P.I. de C.V. (BWMX)
BWMX is a Mexico-based company that sells household appliances, including kitchen appliances; home solutions; laundry and cleaning; and beauty and personal care products. It is a subsidiary of Ebc Holdings, Inc. and operates through two segments: Home Organization Products (Betterware or BWM) and Beauty and Personal Care Products (JAFRA).
On May 26, backed by its strong financials, the company paid an aggregate dividend of MX$150 million, representing approximately $0.2002 per share after applicable tax withholdings. Its four-year average dividend yield is 6.56%, while its annual dividend translates to a 6.84% yield on the prevailing prices. BWMX’s dividend payouts have grown at a CAGR of 74.6% over the past three years.
In terms of trailing-12-month BWMX’s EBIT and gross profit margins of 14.85% and 70% are 104.2% and 98.6% higher than the industry averages of 7.27% and 35.24%, respectively. Likewise, its trailing-12-month ROCE of 57.32% compares to the industry average of 9.84%.
BWMX’s net revenue increased 74.9% year-over-year to Mex$3.27 billion ($191.14 million) in the first quarter (ended March 31, 2023), while its gross profit improved 100.2% from the year-ago value to Mex$2.38 billion ($139.13 million).
The company’s operating income amounted to Mex$565.21 million ($33.05 million), representing an increase of 7.4% from the prior-year quarter. Also, its EBITDA stood at Mex$658.96 million ($38.53 million), up 20.3% year-over-year.
The consensus EPS estimate of $0.37 for the fiscal second quarter (ended June 30, 2023) represents a 24.3% improvement year-over-year. The consensus revenue estimate of $184.85 million for the to-be-reported quarter indicates a 15.7% increase from the same period last year. The company has a promising revenue surprise history, surpassing the consensus revenue estimates in each of the trailing four quarters.
Over the past six months, the stock has gained 80.8% to close the last trading session at $13.22. Also, it has gained 105.9% year-to-date.
It’s no surprise that BWMX has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. It also has an A grade for Sentiment and Quality and a B for Value. Out of 42 stocks in the same industry, it is ranked first.
In addition to the POWR Ratings we’ve stated above, we also have BWMX’s ratings for Growth, Momentum, and Stability. Get all BWMX ratings here.
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ODP shares were trading at $48.35 per share on Wednesday afternoon, up $0.22 (+0.46%). Year-to-date, ODP has gained 6.17%, versus a 17.59% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
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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