This past earnings season was impressive. Over the past month, 88% of companies have topped earnings expectations, while 80% have beat on the top line. It’s an indication that the economy is robust and that analysts continue to underestimate this recovery.
Approximately 70% of the US economy is driven by consumption. So, it’s not a coincidence that a variety of measures showing the health of the consumer are in good shape. This includes wages, household savings, consumer confidence, and consumer spending. Additionally, the expected improvement in the labor market and positive outlook for growth in the second half will ensure that this positive picture is not temporary.
A major beneficiary of these conditions are retail stocks. They benefit from the economy reopening, leading to a massive rebound in foot traffic and record levels of consumer spending. We can use the POWR Ratings to identify ‘Strong Buy’ rated stocks such as Best Buy (BBY), Big Five Sporting Goods (BGFV), and Foot Locker (FL).
Best Buy (BBY)
BBY is one of the leading retailers of technology and electronics in North America. In recent years, growth has been driven by growth in online sales and through the selling of services and warranties.
BBY was a beneficiary of the pandemic as spending on tech items skyrocketed, resulting in shortages and delays for many items. The company was able to meet this demand through a combination of online sales and curbside pickups. Unlike some companies, its momentum has remained strong after the pandemic as there is pent-up demand to go shopping and consumer spending remains strong.
In its most recent quarter, BBY’s revenue increased 35.9% to $11.6 billion. Domestic revenue was up 37.0% to $10.84 billion, while international revenue grew 23%. As a result, operating income increased 235.8% to $769 million, and net income increased by 274% to $595 million.
For 2021, analysts are forecasting revenue growth of 4% to $49.1 billion and $8.20 in earnings per share. Since taking over the company a few years ago, BBY’s management team has been remarkably successful in warding off the Amazon (AMZN) threat by agreeing to match prices, investing in its workforce, making stores leaner, and growing its online marketplace.
The POWR Ratings are quite bullish on BBY as it has an overall rating of A, which equates to a Strong Buy in our proprietary POWR Ratings system. This makes sense considering that online sales and curbside pickup continue to grow at a material rate, while in-store traffic is returning to pre-coronavirus levels.
The POWR Ratings also evaluates stocks by various components. BBY has a B grade for Value which is particularly impressive given its recent strong earnings growth. BBY is considerably cheaper than the S&P 500 with a price-to-earnings ratio of 13.5. To see more of BBY’s component grades including Growth, Stability, Sentiment, Momentum, Stability, Quality, and Industry, click here.
Big Five Sporting Goods (BGFV)
BGFV is a sporting goods retailer, primarily on the West Coast, that operates 430 stores in 11 states. It sells a variety of products including shoes, apparel, accessories, and equipment for gun enthusiasts, hunting, and fishing.
BGFV was a big winner during the pandemic like many sporting goods retailers. One factor was the increase in gun sales as Democrats took control of Congress and the executive branch which increased concerns about gun regulation. Another category that saw huge growth during the pandemic was outdoor activities like camping, fishing, boating, and hunting which weren’t impacted by social-distancing guidelines.
Despite concerns that the economic reopening would negatively impact this trend, BGFV’s Q1 results showed that net sales increased by 25.3% to $272.81 million, and EPS increased by 536% to $0.96 per share. Next quarter, analysts are expecting 28% revenue growth and EPS of $1.08.
Over the last few weeks, shares are down by 32% which could be an interesting entry point especially as the company’s momentum remains intact. The POWR Ratings is consistent with this outlook as it has an overall A rating which translates to a Strong Buy.
Despite its strong growth figures, BGFV also has an A for Value given its forward PE of 10.6 which is substantially cheaper than the S&P 500. Click here to see additional POWR Ratings component grades for BGFV.
Foot Locker (FL)
There seems to be an FL in every suburban mall, and the company has been able to grow to new heights with the rise of sneaker culture. Sneakers have become a collector’s item, fashion statement, and a way to express personal identity for many people - not only something you wear while playing sports.
Currently, FL operates in 27 different countries with 2,952 stores. It also has been growing its online presence. Its momentum is evident in its recent earnings report as total sales came in at $2.15 billion, an 80.3% increase in same-store sales. Operating income increased by 368% to $282 million.
For the full year, analysts are projecting revenue of $8.6 billion, a 13.5% improvement from last year. EPS is expected to rise 101% to $11.26 per share. A major driver of this is the strength in traffic to malls and retail outlets which is above pre-coronavirus levels in many states that have relaxed restrictions like Texas and Arizona.
It’s no surprise that FL has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. A-rated stocks have posted an average annual performance of 30.7% which is significantly better than the S&P 500’s annual performance of 7.1%
FL has strong component grades across the board including an A for Growth and an A for Value. FL is certainly unique in that typically, there’s a trade-off between both measures. However, FL is rare in that it is cheaper than the broader market while having a faster growth rate. To learn more about FL’s component grades, click here.
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BBY shares were trading at $114.83 per share on Monday afternoon, up $1.78 (+1.57%). Year-to-date, BBY has gained 16.51%, versus a 14.75% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of POWR Growth newsletter. Learn more about Jaimini’s background, along with links to his most recent articles.
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