Specialty retailers benefit from robust consumer spending, easing inflation, rising disposable income, and the availability of attractive credit options. With the market looking forward to rate cuts following the Fed pause in its last meeting, specialty retailers remain well-positioned for growth.
However, not all specialty retailers are well-positioned for growth. GameStop Corp. (GME) may not be a beneficiary of the favorable specialty retail landscape. Instead, shares of quality specialty retailers MINISO Group Holding Limited (MNSO), Aeon Co., Ltd. (AONNY), and NEXT plc (NXGPY) could be wise portfolio additions this month.
Before diving deeper into the fundamentals of these stocks, let’s discuss why the specialty retail industry is well-positioned for growth and why it could be prudent to avoid GME.
Despite concerns of a slowing economy, consumer spending shows no signs of slowing down. Consumer spending increased 0.7% in September despite high prices and borrowing rates. Retail sales also showed strong growth, rising 0.7% in September, more than twice what economists had expected.
Robust consumer spending has been benefiting specialty retailers. Moreover, factors like growing consumer demand for niche items, higher disposable income, a rise in online shopping, changing demographics, increasing urbanization, and changing consumer preferences are boosting demand for specialty retailers. The global specialty retailers market is expected to grow at a CAGR of 4% to reach $42.70 billion by 2031.
Also, amid signs that the Fed may not be hiking rates further this year and the economy will be able to achieve a soft landing, specialty retailers find themselves in an advantageous position.
However, Texas-based games and entertainment products company GME, once a favorite meme stock, is unlikely to benefit. The stock has underperformed, declining 31.2% year-to-date and 45.1% over the past year to close the last trading session at $12.70. At a time when games are available for download online, GME is operating physical stores that sell disc-based video games.
Disc-based video games are increasingly becoming a thing of the past, and despite the company’s efforts to reduce costs, it has failed to turn profitable. For the second quarter ended July 29, 2023, GME’s net sales rose marginally over the prior-year quarter to $1.16 billion. Its adjusted net loss narrowed 91.6% year-over-year to $9 million. It reduced its adjusted selling, general and administrative expenses by 15.9% year-over-year to $326.60 million.
GME also ranks poorly in terms of profitability. GME’s trailing-12-month net income margin is negative 1.72% compared to the 4.29% industry average. Likewise, its trailing-12-month Return on Common Equity is negative 7.65% compared to the 11.34% industry average. Furthermore, the stock’s negative 1.65% trailing-12-month EBITDA compares to the industry average of 11.04%.
Considering these factors, investors could buy MNSO, AONNY, and NXGPY instead of GME. Now, let’s analyze the fundamentals of these three Specialty Retailers stock picks, starting with the third choice.
Stock #3: MINISO Group Holding Limited (MNSO)
Guangzhou, China-based MNSO retails lifestyle products and pop toy products in China, Asia, the United States, and Europe. The company offers products in various categories, including home décor products, small electronics, textiles, accessories, beauty tools, toys, cosmetics, personal care products, snacks, fragrances and perfumes, and stationeries and gifts under the MINISO and WonderLife brand names.
On September 15, 2023, MNSO announced that following the expiration of the share repurchase program it had adopted in September 2022, the board of directors of the company authorized and approved a new share repurchase program under which it may repurchase up to $200 million. This is expected to create value for the shareholders.
In terms of the trailing-12-month net income margin, MNSO’s 15.42% is 259.1% higher than the 4.29% industry average. Likewise, its 18.81% trailing-12-month EBITDA margin is 70.3% higher than the industry average of 11.04%. Furthermore, the stock’s 13.15% trailing-12-month Return on Total Assets is 237.7% higher than the industry average of 3.89%.
For the fiscal fourth quarter ended June 30, 2023, MNSO’s revenue rose 40.3% year-over-year to RMB3.25 billion ($446.14 million). Its gross profit increased 67.9% over the prior-year quarter to RMB1.30 billion ($178.46 million). The company’s profit for the period increased 162.4% year-over-year to RMB546.99 million ($75.08 million). Also, its EPS for ordinary shares came in at RMB0.43, representing an increase of 152.9% year-over-year.
For the quarter ended September 30, 2023, MNSO’s EPS and revenue are expected to increase 32.3% and 30% year-over-year to $0.25 and $509.80 million, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 301.1% to close the last trading session at $25.75.
MNSO’s POWR Ratings reflect its solid prospects. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #14 out of 42 stocks in the Specialty Retailers industry. It has a B grade for Growth, Momentum, Sentiment, and Quality. Click here to see the other ratings of MNSO for Value and Stability.
Stock #2: Aeon Co., Ltd. (AONNY)
Headquartered in Chiba, Japan, AONNY operates in the retail industry in Japan, China, ASEAN countries, and internationally. It operates through General Merchandise Store (GMS) Business, Discount Store Business, Supermarket (SM) Business, Health and Wellness Business, Financial Services Business, Shopping Center Development Business, Services and Specialty Store Business, International Business, and Other Business segments.
In terms of the trailing-12-month gross profit margin, AONNY’s 36.90% is 8.9% higher than the 33.89% industry average.
AONNY’s operating revenue for six months ended August 31, 2023, increased 5% year-over-year to ¥4.71 trillion ($31.18 billion). Its operating gross profit rose 6.6% year-over-year to ¥1.75 trillion ($11.58 billion). The company’s operating profit increased 22.7% year-over-year to ¥117.62 billion ($778.57 million). In addition, its profit attributable to owners of the parent rose 29.3% year-over-year to ¥23.32 billion ($154.36 million).
Analysts expect AONNY’s revenue for fiscal 2024 to increase significantly year-over-year to $63.32 billion. Over the past year, the stock has gained 10% to close the last trading session at $20.60.
AONNY’s POWR Ratings reflect this positive outlook. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
Within the same industry, it is ranked #2. It has a B grade for Growth, Stability, and Quality. To see the other ratings of AONNY for Value, Momentum, and Sentiment, click here.
Stock #1: NEXT plc (NXGPY)
Headquartered in Enderby, the United Kingdom, NXGPY retails clothing, beauty, footwear, and home products in the United Kingdom, the rest of Europe, the Middle East, Asia, and internationally. The company operates through NEXT Retail; NEXT Online; NEXT Finance; Total Platform; Joules; Property Management; and International Retail, Sourcing, and other segments. It operates through retail stores, online retail platforms, and franchise stores.
In terms of the trailing-12-month net income margin, NXGPY’s 13.63% is 217.5% higher than the 4.29% industry average. Likewise, its 18.57% trailing-12-month EBIT margin is 150.8% higher than the industry average of 7.40%. Furthermore, the stock’s 1.27x trailing-12-month asset turnover ratio is 27.2% higher than the industry average of 1x.
For the six months ended July 29, 2023, NXGPY’s revenue rose 5.8% year-over-year to £2.52 billion ($3.09 billion). Its gross profit increased 10.9% year-over-year to £1.10 billion ($1.35 billion). The company’s operating profit rose 4.2% year-over-year to £452.50 million ($555.05 million). In addition, its profit for the period came in at £318.30 million ($390.43 million). Also, its EPS stood at £262.6p, indicating an increase of 0.7% year-over-year.
Street expects NXGPY’s revenue for fiscal 2025 to increase 4.9% year-over-year to $6.98 billion. Over the past year, the stock has gained 49.6% to close the last trading session at $45.87.
NXGPY’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to Buy in our proprietary rating system.
It is ranked first in the Specialty Retailers industry. It has an A grade for Quality and a B for Momentum and Stability. Click here to see the additional ratings of NXGPY for Growth, Value, and Sentiment.
What To Do Next?
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AONNY shares were unchanged in premarket trading Friday. Year-to-date, AONNY has declined -1.49%, versus a 14.70% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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