Consumer spending held up well in April in the face of high inflation and rising borrowing costs. Amid increasing consumer spending, higher disposable income, and the growth in e-commerce, the retail industry is well-positioned to witness significant growth in the foreseeable future. Given this backdrop, investing in fundamentally sound retailer stock Build-A-Bear Workshop, Inc. (BBW) could be wise.
On the contrary, SIGNA Sports United N.V. (SSU) and Rent the Runway, Inc. (RENT) could be avoided now, considering their weak fundamentals and limited growth prospects. Let’s understand this in detail.
The Commerce Department reported that the Personal Consumption Expenditures (PCE) price index rose 0.4% in April and 4.4% year-over-year. Excluding volatile food and energy costs, the core PCE increased by 0.4% for the month and 4.7% from the previous year, exceeding economists’ estimates of 0.3% and 4.6%, respectively.
Despite the persistently high inflation, consumer spending rose 0.8% in April, mainly supported by increased personal income. Personal income accelerated 0.4% for the month, according to estimates released by the Bureau of Economic Analysis. Increasing consumer demand and higher disposable income are expected to improve the retail industry’s outlook.
Changing consumers’ buying behavior and the influx of international brands also fuel the industry’s growth prospects. Retailers are embracing digital commerce by leveraging technology to improve shopping experiences. According to Growth Market Reports, the global specialty retailers market is expected to reach $42.73 billion by 2031, growing at a 4% CAGR.
Given the industry’s tailwinds, quality retailer stock BBW could be an ideal buy now. However, considering their weak fundamentals and growth prospects, SSU and RENT might be best avoided.
Let’s discuss the featured stocks in detail.
Stock to Buy:
Build-A-Bear Workshop, Inc. (BBW)
BBW is a multi-channel retailer of plush animals, pre-stuffed products, customizable sounds and scents, clothing, accessories, and novelty items. The company operates through three segments: Direct-to-Consumer; Commercial; and International Franchising. It sells its products through e-commerce and third-party marketplaces.
On May 25, BBW partnered with Kalahari Resorts & Conventions, known for its expansive indoor waterparks, to introduce BBW stores in all four Kalahari Resorts. BBW aims to tap into non-traditional, tourist, and destination areas by strategically venturing beyond traditional malls, bolstering its growth and profitability.
On May 22, BBW partnered with Axiom Space to include a flurry fifth crew member, Gigi, in the Axiom Mission 2 (Ax-2) alongside the astronauts. This unique collaboration is expected to enhance the company's visibility and brand recognition, fostering increased consumer interest and potential growth opportunities.
The stock’s trailing-12-month gross profit margin of 52.9% is 50.6% higher than the 35.15% industry average. Likewise, its trailing-12-month EBITDA margin of 16.15% is 48.5% higher than the 10.88% industry average.
For the fiscal 2023 first quarter that ended April 29, BBW’s revenue increased 2% year-over-year to $120.05 million. Its EBITDA grew 4.2% year-over-year to $22.36 million. In addition, the company’s net income rose 2.9% from the year-ago value to $14.61 million, while EPS grew 10.1% year-over-year to $0.98.
The consensus revenue estimate of $492.93 million for the fiscal year ending January 2024 reflects a 5.3% year-over-year improvement. Likewise, the consensus EPS estimate of $3.46 for the current year indicates a 12.3% rise year-over-year. Moreover, the company surpassed the consensus revenue estimates in three of the trailing four quarters, which is impressive.
Shares of BBW have gained 12.9% over the past five days to close the last trading session at $20.61.
BBW’s solid fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
BBW has an A grade for Quality. It has ranked #9 in the 44-stock Specialty Retailers industry.
In addition to the POWR Ratings I’ve just highlighted, you can see BBW’s ratings for Growth, Value, Sentiment, Momentum, and Stability here.
Stocks to Avoid:
SIGNA Sports United N.V. (SSU)
Headquartered in Berlin, Germany, SSU runs online sports web shops across the European Union, Switzerland, Norway, the United Kingdom, and the United States. It offers a wide range of products, including athleisure apparel for bike enthusiasts, tennis/racket sports players, outdoor adventurers, and team sports enthusiasts.
SSU’s trailing-12-month gross profit margin of 19.16% is 45.5% lower than the 35.15% industry average. Furthermore, the stock’s trailing-12-month EBITDA margin of negative 13.95% compares to the 10.88% industry average.
On March 16, SSU issued a trading update for the first quarter of fiscal 2023, which ended December 31, 2022. The company’s gross margin decreased by 698 bps year-over-year to 29.6% in the first quarter, reflecting increased markdowns necessary to align inventory levels with targets, particularly in overstocked categories within the lower-priced bike market.
SSU’s CEO, Stephan Zoll, said, “The unexpected consumer sentiment deterioration and inflationary pressures due to the conflict in Ukraine, continued to significantly impact our operations and margins in the first quarter of fiscal 2023, particularly in the bike business and in international geographies.”
For the fiscal year that ended September 30, 2022, SSU’s operating loss widened significantly year-over-year to €580 million ($620.25 million). Its adjusted EBITDA loss came in at €66.50 million ($71.12 million), compared to an income of €29.60 million ($31.65 million) in the prior year. Also, the company’s net loss worsened considerably from the previous year to €565.70 million ($604.96 million).
Furthermore, as of September 30, 2022, the company’s total liabilities came in at €692.20 million ($740.24 million), compared to €369.50 billion ($395.14 million) as of September 30, 2021.
For the third quarter ending June 2023, analysts expect SSU’s revenue to marginally decrease year-over-year to $330.03 million. The company’s loss per share for the current quarter is expected to widen 100.8% year-over-year to $0.13. SSU has plunged 45.1% over the past six months to close the last trading session at $3.05.
SSU’s weak fundamentals are reflected in its POWR Ratings. It has an overall F rating, equating to a Strong Sell in our proprietary rating system.
The stock has an F grade for Value and Quality and a D for Momentum. It is ranked last in the 44-stock Specialty Retailers industry.
Click here to see the other ratings of SSU for Sentiment, Stability, and Growth.
Rent the Runway, Inc. (RENT)
RENT operates a shared designer closet platform, granting customers unlimited access to its closet through subscriptions or the option to rent items individually via reservations. Additionally, it enables subscribers and customers to purchase products through its resale service. The platform has around 141,205 active subscribers.
The stock’s trailing-12-month EBITDA margin of negative 10.16% compares to the 10.88% industry average. Its trailing-12-month net income margin of negative 46.79% compares to the industry average of 4.28%. Moreover, RENT’s trailing-12-month asset turnover ratio of 0.76x is 24.8% lower than the 1.01x industry average.
For the fourth quarter that ended January 31, 2023, RENT’s operating loss stood at $17.80 million. Its net loss and loss per share came in at $26.20 million and $0.40, respectively.
Also, the company’s cash outflows from operating activities increased 12.8% year-over-year to $47.70 million, while its cash outflows from investing activities were $44.30 million, up 96.9% year-over-year.
Analysts expect RENT to report a loss per share of $1.74 for the fiscal year ending January 2024. Similarly, the company is expected to report a loss per share of $1.49 for the fiscal year 2025. Over the past year, RENT has slumped 53% to close the last trading session at $2.09.
RENT’s bleak outlook is reflected in its overall D rating, equating to Sell in our POWR Ratings system. It has a D grade for Value, Stability, Quality, and Momentum. The stock is ranked #43 within the same industry.
Click here to access additional RENT ratings (Growth and Sentiment).
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
BBW shares were trading at $21.12 per share on Tuesday afternoon, up $0.51 (+2.47%). Year-to-date, BBW has declined -11.41%, versus a 12.11% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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