3 Debt-Free Retail Companies With Top Line Growth
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Retail shops often get into trouble when they over expand using leverage. Dick's Sporting Goods (NYSE: DKS), Jos. A Bank Clothiers (NASDAQ: JOSB), and Ulta Salon, Cosmetics & Fragrance (NASDAQ: ULTA) don't have any debt on their balance sheets, and have been steadily growing revenues for over a decade.
No debt, no problem
One of the big fears right now is that interest rates are going to head higher. That's bad for companies that make use of debt because it can potentially increase their funding costs. If a company is leveraged enough, an increase in rates can create solvency issues. Then there are companies doing so well that they don't need debt at all.
In the retail world, that materially increases flexibility. For example, if debt costs cause competitors to pull back, debt free retailers suddenly get better pricing as they continue to push growth. The perfect example of this was the 2007 to 2009 recession. While some retailers saw their top lines fall as consumers reduced spending, Jos. A Bank, Ulta, and Dick's all saw revenues increase as they continued to expand.
That's the type of retail stock you want to own when the going gets tough.
Over the past decade, Dick's revenue has grown from $1.5 billion $5.8 billion. Earnings per share have advanced from $0.53 to $2.30. Although the recession led to a share net loss, the top line kept chugging right along. That's an impressive showing for a company that sells discretionary items that could easily be described as toys.
Although a good portion of Dick's sales come from clothing, everything it sells is sports related. The company owns 520 Dick's Sporting Goods stores in 44 states and 81 Golf Galaxy stores in 30 states. It has internet sites and catalogs for each concept.
While the sporting goods industry has been growing at about 2%, Dick's has been growing at 16%. Management believes that it can open over 1,100 Dick's stores in the United States, more than double the store base today.
With no debt and a good outlook, Dick's shares should interest growth investors. Moreover, a price to earnings ratio of about 21 suggests that shares are fairly priced based on the strong historical growth the company has achieved.
A make-up darling
Ulta Beauty stores look and feel just like LVMH Moet Hennessy Louis Vuitton's Sephora stores. That's a good sign, however, because Sephora is one of the best performing segments of LVMH and looks set to overtake the company's iconic leather bags as the largest contributor to the top line.
Ulta has 575 stores in 46 U.S. states. Sales have grown every year for the past decade, with earnings trending higher, too. Although earnings dipped slightly in 2009, they picked up again the next year and are now more than double their pre-recession levels. And its profit margin has more than doubled since the recession's end, too.
Ulta shares are trading near their all time highs and the P/E is a high 35 or so. More aggressive growth investors, however, might still be interested since growth has been solid so far and management believes that it has room to more than double the store count.
Clothing for men
Jos. A Bank not only grew revenue right through the recession, but its bottom line also kept heading higher. That's impressive for any retailer, let alone one that only sells clothing for men. In fact, profit margins were on a generally higher tract until last year, when they fell over four percentage points. That led to the first earnings decline in a decade, with the bottom line falling from $3.49 to $2.89 a share.
The shares have fallen from their all time high of around $55 reached at the end of 2011 to their recent price in the $40 range. Sales and earnings fell year over year in the April quarter, too, so performance hasn't turned higher yet. Increasing costs for products and weak advertising results are what management attributes the weakness to.
Although that could be the sign of a mature business getting ready to slow down, Men's Wearhouse has over 1,200 stores compared to Jos. A Bank's 600 or so stores. That suggests that Jos. A Bank has plenty of room to expand. It could be a good time now for growth investors to pick up a historically strong grower at a bargain price: Its P/E is only about 16.
Growing without debt
Although not using debt is a conservative approach to running a business, it doesn't mean that a company can't grow quickly. Ulta, Dick's, and Jos. A Bank all prove this. The benefit of such a conservative balance sheet, of course, is safety in bad times. That's well worth the slightly high price tags at Dick's and Ulta. Jos. A Bank, meanwhile, is working through some difficulties, but has plenty of time to figure things out.
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Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Ulta Salon, Cosmetics & Fragrance. The Motley Fool owns shares of Ulta Salon, Cosmetics & Fragrance. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!