Adding Value to Consumer's Dollars and Investor's Portfolios
tarun is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Most brick and mortar retailers are having a hard time delivering. Comparable same store sales are falling, and revenues for most retailers is more or less flat, if not declining. Further, many are trimming guidance for the future too.
While nothing seems to be going right for most retailers, there are a few companies that are showing great performance and positive outlook for the future. Let's analyze three companies that offer good potential for your portfolio.
One membership warehouse looks good
When retail giants like Wal-Mart and Target are delivering more or less flat comp sales, Costco Wholesale (NASDAQ: COST) took the limelight by reporting a 5% increase in comparable store sales. Overall, Costco’s third quarter earnings were excellent, as profit surged 19% compared to the same period last year, to $1.04 a share, and revenue for the quarter increased 7.9% to $24.08 billion.
Unlike its peers (with the exception of Wal-Mart's Sam's Club stores,) Costco charges an upfront membership fee and sells goods at a discount. The upfront collection of fees guarantees solid cash flow in the beginning and confirms the future inflow as consumers who pay membership fees get tied to the company. A 12% increase in the collection of membership fees -- despite a 15% hike -- compared to last year, with retention of almost 90%, makes it evident that Costco has a loyal bunch of shoppers.
Costco is growing steadily, and has a long-term plan of having 1,200 clubs. Right now, it's focusing heavily on international sales growth. In 3Q13, the company’s international comparable store sales surged 4% QoQ. Moreover, about 50% of Costco’s revenue comes from its international business, which is a far larger percentage than Wal-Mart's overseas operations, depicting its strength in the international markets. The company also has tremendous potential to grow globally as it is currently in its early stage of expansion. The Asian and Australian markets are also booming from where Costco can derive most of its growth.
Costco is one of the few large cap retailers that is showing strong growth quarter over quarter. With a P/E ratio of 24 times, Costco looks expensive as it is trading well above the sector average, but it is also the company offering great earnings, too. I strongly believe the company is heading in the right direction with its strategies and is perfectly placed to please its customers and investors.
Maybe the smallest, but the best fetch
Dollar Tree (NASDAQ: DLTR) is the smallest of the dollar stores in terms of store count, with around 4,700 stores. Though it’s comparatively smaller than Dollar General and Family Dollar, it has been the best performer among the three as its stock appreciated about 23% in the last 12 months.
With other Dollar stores complaining about bad weather, increase in payroll taxes, delayed tax refunds to cover current performance, and cutting guidance, Dollar Tree has performed well and has raised its guidance. Dollar Tree has been successful because of its single price, $1 per merchandise offering. Further, its solid execution of strategies, and smart plans focusing on expansion, has helped it prosper.
Dollar General and Family Dollar's margins are shrinking continuously as sales of low-margin consumables has increased in comparison to high-margin non-consumables. Further, the sale of tobacco has affected margins. Dollar Tree, on the other hand, has been successful in holding its margins as it has successfully grown its discretionary sales, rather than consumables.
The current stock price is about 15% lower than its 52-week high of $56.80, which leaves ample scope for an upward movement in its price. Among all the dollar stores, Dollar Tree seems to be the best of the lot.
In a different league altogether
Specialty value retailer Five Below (NASDAQ: FIVE) reported spectacular earnings recently that put it back in the spotlight. The company’s net sales surged 33% to $95.6 million compared to the same period last year. Growth on the bottom line is also great, as the company converted its year-ago deficit into a $0.05 profit, beating analysts' estimates.
A swiftly growing retailer, Five Below sells mainly fashionable clothing, accessories, and furnishings, for $5 or less. Its business format and merchandise offerings are attracting teens and young adults to its stores by fulfilling their expectations within $5. Target and Wal-Mart may attract customers by being cheap, but Five Below seems to be succeeding with its cheaper chic approach.
Analysts believe that Five Below is very small in comparison to Target and Wal-Mart, and would virtually have no effect on them, but it's eating Target's popularity among young shoppers and Wal-Mart's future customers if they get too attracted to Five Below.
Five Below operates with only 258 stores at the moment, leaving plenty of scope to grow and reach its 2,000 store mark. The company has raised its guidance for the year in the range of $0.65 a share to $0.68 a share. Currently, Five Below carries a forward P/E ratio of 40, but with 28 straight quarters of same store sales growth and with an expected 30% rise in sales. all seems achievable.
All retailers have something different to offer to their customers. Costco's deep discount model with an upfront membership fee offers stability to the company's income stream. Dollar Tree and Five Below are offering select merchandise at an extremely low price point which seems to be working well for both companies. As I see it, these retailers are the best picks, keeping in mind the performance of other retailers.
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tarun bachhawat has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. 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!