Although bulls might be back in time to kickstart another 2021-styled short squeeze in GameStop Corp. (GME), fundamentally strong and growing specialty retailer stocks The ODP Corporation (ODP), TravelCenters of America Inc. (TA), and Build-A-Bear Workshop, Inc. (BBW) could generate higher risk-adjusted returns in a fickle-minded market, mirroring a turbulent macroeconomy.
On March 21, GME released its earnings for the fourth quarter and fiscal year 2022. Contrary to Street expectations which were an extrapolation of the company’s string of losses for seven straight quarters, the video game retailer posted a quarterly profit.
This sent the markets into delirium in the after-hours, which continued the next day, amounting to a 40% increase in stock price. This brought back memories of 2021, when easy money, unprecedented hype created by retail investors on social media forums, the excitement of trading, and a desire to short-squeeze came together to send the stock into a frenzy.
While GME’s turnaround, led by chairman and activist investor Ryan Cohen, has seen the company refocus on increasing the efficiency of its stores, its line of business is already in the process of being upended by online application stores run by technology incumbents, which use software-as-a-service to bring game titles directly to users.
Given its increasing cost to borrow (CTB) and restricted liquidity, while GME’s army of loyal backers may be rewarded with yet another short squeeze, with an F grade for Stability and D grades for Value and Momentum in our proprietary rating system, investors would be wise to consider more worthwhile specialty retailer stocks with proven performance for more consistent returns.
Let’s take a closer look at the featured stocks.
The ODP Corporation (ODP)
ODP provides business services, products, and digital workplace technology solutions for small, medium, and enterprise businesses. The company operates through two divisions — Business Solutions and Retail.
On March 13, ODP announced that it would repurchase 2 million shares of its common stock from HG Vora Special Opportunities Master Fund, Ltd. (HG Vora) at $44.55 a share for a total purchase price of $89.1 million. This transaction, which would be financed by funds borrowed under its asset-based lending facility, is part of the existing $1 billion share buy-back plan that was previously announced on November 2, 2022.
Even after this transaction, HG Vora will continue to own 3 million shares or approximately 7.9% of the ODP’s outstanding common stock, and maintain representation on the company’s Board of Directors, while ODP expects to continue its share repurchases under such share buy-back plan, subject to a variety of factors including market conditions, regulatory requirements, and other corporate considerations.
On March 6, ODP announced the launch of its new brand platform, Imagine Success™. The platform, which has been launched to help customers fuel their passions, power their potential, and achieve their goals, will come to life in Office Depot and OfficeMax stores, online across digital platforms, and more.
Despite lower sales of its consumer division, Office Depot, due to planned store closures and lower traffic, during the fourth quarter of the fiscal year that ended December 31, 2022, ODP’s sales increased by 3.1% year-over-year to $2.11 billion. The consolidated results were driven by higher sales in its B2B distribution division, ODP Business Solutions, and a favorable impact related to the 53rd week in the fourth quarter of 2022 of $128 million.
During the same period, ODP’s adjusted EBITDA increased by 2.3% year-over-year to $89 million, while its adjusted operating income increased 23.4% year-over-year to $58 billion. As a result, the company’s adjusted income from continuing operations increased 8.1% and 19.7% year-over-year to $40 million and $0.85 per share.
ODP’s EPS for the first quarter of the fiscal year ending March 31, 2023, is expected to increase 5.5% year-over-year to $1.34. The company has an impressive earnings surprise history of surpassing consensus EPS estimates in three of the trailing four quarters.
For the entire fiscal year, ODP’s EPS is expected to increase by 8.1% over the previous fiscal to $4.75. Street expects the company’s EPS to increase to $6.31 by the fiscal year 2025. The stock has gained 27.5% over the past six months to close the last trading session at $44.83, above its 200-day moving average of $41.66.
ODP’s stellar prospects are reflected in its POWR Ratings. It has an overall rating of B, translating to a Buy in our proprietary rating system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
ODP has an A grade for Growth and a B for Value and Quality. It is ranked #8 of 44 stocks in the Specialty Retailers industry.
Click here to see additional POWR Ratings of ODP for Momentum, Stability, and Sentiment.
TravelCenters of America Inc. (TA)
TA operates travel centers in the United States and Canada under TravelCenters of America, TA, TA Express, Petro Stopping Centers, and Petro brand names. Its offers diesel and gasoline fuel, truck maintenance and repair, full-service and quick-service restaurants, travel stores, car and truck parking, and other services.
On February 16, TA announced that it had entered a merger agreement with BP p.l.c. (BP), with the latter set to acquire all outstanding shares of TA for $86.00 per share in cash, subject to approval by shareholders who own a majority of those shares.
According to TA, this unsolicited acquisition request resulted from the company’s successful implementation of turnaround and strategic plans.
With regards to another conditional, unsolicited, and unfinanced acquisition proposal from ARKO Corp (ARKO), on March 28, TA’s board of directors determined that it is neither superior to the transaction TA previously agreed to with BP nor is it likely to lead to a superior proposal.
TA’s board has unanimously concluded that ARKO’s proposal bears significant financing and closing risk, given ARKO’s lack of committed financing and sub-investment grade credit rating, and is not in the best interest of TA shareholders. This speaks volumes of the value TA places on fulfilling its fiduciary duty to its shareholders.
On January 30, TA announced an agreement with ElectrifyAmerica, the largest open direct current fast-charging network in the U.S., to offer electric vehicle charging at select TA/Petro locations, with the first stations planned to be deployed in 2023. The latter will install, operate and maintain the 1000 DC chargers bought by the former, at 200 TA/Petro locations, through its Electrify Commercial business unit.
On January 12, TA announced that it had signed 30 new franchise agreements in 2022, reaching its annual target. With a focus on franchising for accelerated network growth, in 2022, TA opened three new franchised sites and plans to open 20 franchised locations in 2023.
In the fourth quarter of the fiscal year that ended December 31, 2022, TA’s total revenues increased 30.7% year-over-year to $2.66 billion. During the same period, its income from operations grew 155% from the year-ago value to $69.47 million, while its adjusted EBITDA rose 87.5% from the prior-year period to $99.20 million.
Furthermore, the company’s adjusted net income came in at $44.58 million or $2.99, up 238.1% and 236% year-over-year, respectively.
TA’s revenue and EPS for the first quarter of the fiscal year ending March 31, 2023, are expected to increase by 5.7% and 87.4% year-over-year to $2.43 billion and $1.93, respectively. The company has an impressive earnings surprise history since it has topped the consensus EPS estimates in three of the trailing four quarters.
Because of BP’s generous offer for acquisition, TA’s stock has gained 2.3% over the past month and 60% over the past six months to close the last trading session at $86.31, above its 50-day and 200-day moving averages of $69.62 and $54.24, respectively.
TA’s steady outlook has earned it an overall POWR Ratings of B, which translates to a Buy in our proprietary rating system. It also has a B grade for Value.
TA is ranked #11 of 45 stocks in the Specialty Retailers industry. Click here to see additional POWR Ratings for Growth, Momentum, Sentiment, Quality, and Stability for TA.
Build-A-Bear Workshop, Inc. (BBW)
BBW operates as a multi-channel retailer of plush animals and related products. The company operates through three segments: Direct-to-Consumer; Commercial; and International Franchising. It runs around 346 locations managed by corporate and 72 franchised stores in Asia, Australia, the Middle East, Africa, and South America.
On March 8, BBW declared a special cash dividend of $1.50 per share, to be paid on April 6, 2023, to all stockholders of record as of March 23, 2023.
For the fiscal 2022 fourth quarter ended January 28, 2023, BBW’s total revenues came in at $145.11 million, up 11.7% year-over-year. Its consolidated gross profit increased 14.8% from the prior-year period to $79.80 million. The company’s EBITDA rose 26.3% year-over-year to $29.38 million.
During the same period, BBW’s adjusted net income increased 20.8% year-over-year to $19.14 million, while its adjusted net income per common share came in at $1.30, up 34% year-over-year.
BBW’s revenue and EPS for the fiscal year ending January 2024 are expected to increase by 6.2% and 12.3% year-over-year to $497.12 million and $3.46, respectively. The company has also impressed by surpassing consensus EPS estimates in three of the trailing four quarters.
The stock has gained 11.2% over the past month and 81.6% over the past six months to close the last trading session at $22.73, above its 200-day moving average of $19.20.
BBW’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system. It has an A grade for Quality and a B for Growth and Sentiment.
BBW is ranked #11 in the same industry. See the additional POWR Ratings for BBW’s Momentum, Stability, and Value here.
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GME shares were trading at $22.65 per share on Friday morning, up $0.15 (+0.67%). Year-to-date, GME has gained 22.70%, versus a 6.61% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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