Despite the supply-chain challenges and high inflation, the retail sector has remained resilient thanks to strong consumer spending. Moreover, retail companies are finding innovative solutions to navigate the challenges.
Given the industry’s resilience, I evaluated two growth stocks, GameStop Corp. (GME) and The ODP Corporation (ODP), to determine which has better upside potential. Based on the fundamental comparison of these stocks, I believe ODP is the better buy for the reasons explained throughout this article.
Before analyzing these stocks, let’s discuss what’s happening in the retail sector.
The U.S. consumer spending remains resilient despite 500 basis points worth of interest rate hikes since March 2022. As inflation subsides, consumer spending is increasing gradually.
U.S. retail sales increased by 1.5% year-over-year in June, suggesting consumer spending is rising amid economic headwinds. Moreover, retail sales, excluding automobiles, gasoline, building materials, and food services, rose 0.6% in the same month.
Total retail sales worldwide are expected at $29.3 trillion in 2023, indicating a 3.9% increase from the previous year. The industry’s annual growth rate is expected to average 3.8% from 2023 to 2026. Further, the global retail market is expected to reach $37.66 trillion in 2027, growing at a CAGR of 7.4%.
With increasing consumer demand, higher disposable income, and changing consumer preferences, specialty retailers are expected to benefit. The global specialty retailers market will likely hit $42.73 trillion by 2031, exhibiting a CAGR of 4%.
In terms of price performance, ODP has gained 15.7% over the past month compared to GME’s 5.7% decline. Over the past nine months, ODP has surged 26.2%, while GME has lost 5.6%. Moreover, in terms of past year’s performance, ODP is the clear winner with 34.5% gains versus GME’s 38.9% decline.
Here are the reasons why we think ODP could perform better in the near term:
Latest Developments
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.
Recent Financial Results
In the first quarter that ended on April 1, ODP’s sales amounted to $2.11 billion, while its non-GAAP operating income grew 12.5% year-over-year to $99 million. Its adjusted EBITDA came in at $131 million, up 4.8% from last year’s period.
Non-GAAP net income and EPS from continuing operations stood at $75 million and $1.78, respectively, representing 17.2% and 40.2% improvement year-over-year. Also, the company’s adjusted free cash flow increased substantially from the prior-year quarter to $133 million.
GME’s revenues declined 10.3% year-over-year to $1.24 billion in the first quarter ended April 29, 2023. Gross profit fell 3.7% from last year to $287.30 million, while its adjusted EBITDA loss amounted to $29.40 million.
The company’s adjusted operating loss narrowed 66.7% from the prior-year quarter to $51.20 million. Also, its non-GAAP net loss came in at $42.30 million and $0.14 per share in the same period.
Past and Expected Financial Performance
Over the past three years, ODP’s net income and EPS grew at 10.4% and 15.2% CAGRs, respectively. Analysts expect ODP’s EPS to increase by 12.8% in fiscal 2023 (ending December 2023) and 15.2% in fiscal 2024.
The company’s revenue is expected to decrease by 3.4% in the current year and marginally during the following year. Moreover, ODP’s EPS is expected to grow 12.3% per annum over the next five years.
GME’s revenue declined at a 6.9% CAGR over the past five years. However, the company’s total assets increased at 7.5% CAGR over the past three years, while its levered free cash flow grew at a CAGR of 38.8%.
Street expects the GME’s revenue to decrease by 3.7% for the fiscal year 2023 (ending January 2024) and 3% in the fiscal 2024. Its loss per share is expected to amount to $0.26 in the current year and $0.25 in the next year. Moreover, GME’s EPS is expected to decline at a rate of 48.2% per annum over the next five years.
Profitability
ODP’s trailing-12-month revenue is 1.45 times what GME generates. Moreover, ODP is more profitable, with an EBITDA margin and net income margin of 4.04% and 2.17% compared to GME’s negative 1.98% and 3.56%, respectively. Also, ODP’s Capex/Sales of 1.25% is slightly higher than GME’s 0.94%.
In addition, ODP’s ROCE, ROTA, and ROTC of 14.77%, 4.53%, and 7.26% compared with GME’s negative 15.11%, 6.70%, and 5.41%, respectively.
Thus, ODP is more profitable.
Valuation
In terms of forward EV/Sales, ODP is currently trading at 0.30x, 72.9% lower than GME, which is trading at 1.11x. ODP’s forward EV/EBITDA multiple of 6.07 is relatively lower than GME’s 563.91. Moreover, ODP’s forward Price/Sales of 0.23x is 81.1% lower than GME’s 1.22x. Also, ODP’s trailing-12-month Price/Cash Flow multiple of 5.17 compares to GME’s 22.55.
Hence, ODP is relatively more affordable.
POWR Ratings
ODP has an overall rating of A, which equates to a Strong Buy in our proprietary POWR Ratings system. GME, on the other hand, has an overall rating of D, which translates to Sell. 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. ODP has a B grade for Quality, justified by its higher-than-industry profitability. ODP’s trailing-12-month ROCE and cash per share of 14.77% and 8.85 compared to the industry averages of 9.84% and 2.46, respectively.
On the other hand, GME has a C grade for Quality, consistent with its mixed profitability. GME has a trailing-12-month ROCE of negative 15.11% compared to the industry average of 9.84%. However, the stock’s trailing-12-month cash per share multiple of 3.47 is 41.1% higher than the industry average of 2.46.
In addition, ODP has a grade of B for Value, in sync with its lower-than-industry valuation. In terms of forward EV/EBITDA and Price/Sales, ODP is trading at 6.07x and 0.23x, 37.4% and 74.1% lower than the industry averages of 9.70x and 0.88x, respectively.
Conversely, GME has a grade of D for Value, consistent with its stretched valuation. GME’s forward EV/EBITDA multiple of 563.91 is significantly higher than the industry average of 9.70x. In addition, its forward Price/Sales ratio of 1.22 is 38.2% higher than the industry average of 0.88.
Of the 42 stocks in the Specialty Retailers industry, ODP is ranked #2 while GME is ranked #38.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, Stability, and Sentiment. Click here to view ODP ratings. Get all GME ratings here.
The Winner
Thanks to resilient consumer spending, the retailer’s industry is well-poised for robust growth. As the markets anticipate declining interest rates next year, ODP and GME are expected to benefit. However, GME’s relatively poor financials, unhealthy profitability, and dim growth outlook make its competitor ODP 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?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
GME shares were trading at $22.28 per share on Friday afternoon, down $0.63 (-2.75%). Year-to-date, GME has gained 20.69%, versus a 19.20% 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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