Robust consumer spending, changing consumer demographics, urbanization, credit availability, infrastructure enhancements, and the presence of international brands are collectively brightening the prospects of the specialty retail sector. Therefore, it could be wise to invest in the specialty retail space.

A fundamental comparison of GameStop Corp. (GME) and Betterware de México, S.A.P.I. de C.V. (BWMX) reveals the better upside potential of BWMX. Before I present what makes the investment case stronger for BWMX, let’s see what’s shaping the prospects of the specialty retail space.

For the third quarter, the economy is poised to achieve its most rapid growth in nearly two years, defying recession predictions. Robust consumer spending was fueled by increased wages resulting from a tight labor market. Bloomberg Economics estimates that economic activity has likely expanded at an annualized rate of nearly 5% over the past three months.

Most economists have revised their outlook, now foreseeing the Federal Reserve achieving a "soft-landing" for the economy. Expectations of continued strong worker productivity and a controlled decrease in unit labor costs during July-September underpin this.

Consumer spending, constituting over two-thirds of U.S. economic activity, appears to be the principal catalyst. Americans are purchasing durable items such as motor vehicles and attending concerts. Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, said, “We’re seeing the exact opposite (of a recession).”

He added, “The American consumer, the biggest engine of the U.S. economy seems to have had a mid-year resurgence, largely because confidence improved through the summer because of the rally in the stock market and steadier gasoline prices.”

In addition, shifting consumer demographics, urbanization, accessible credit, infrastructure enhancements, and the proliferation of international brands are driving the specialty retail market. The global specialty retail market is expected to reach $42.70 billion by 2031, growing at a CAGR of 4%.

In terms of price performance, shares of Texas-based games and entertainment products provider GME have declined 22.4% in the past month, while Mexico-based direct-to-consumer company BWMX gained 3.9%. Moreover, over the past three months, GME witnessed a 40% decline, while BWMX jumped 32.9%.

Moreover, GME has plummeted 49% over the past year, closing the last trading session at $13.71, whereas BWMX has surged 108.5% during the same period, closing the last trading session at $17.14.

Here are the reasons I think BWMX is a better investment now:

Recent Financial Results

For the fiscal second quarter that ended July 29, 2023, GME’s net sales increased 2.4% year-over-year to $1.16 billion. However, its adjusted operating loss stood at $20.70 million. Moreover, the company’s adjusted net loss and loss per share came in at $9 million and $0.03, respectively.

In addition, as of July 29, 2023, the company’s cash and cash equivalents amounted to $894.70 million, compared to $908.90 million as of July 30, 2022.

For the second quarter that ended June 30, 2023, BWMX’s gross profit increased 4.5% year-over-year to Ps. 2.36 billion ($128.91 million). Its operating income rose 13.9% from the year-ago value to Ps. 624.87 million ($34.14 million). Also, its EBITDA grew 16.6% from the prior year’s quarter to Ps. 717.43 million ($39.20 million).

In addition, as of June 30, 2023, the company’s cash and cash equivalents stood at Ps. 728.87 million ($39.82 million), compared to Ps. 575.73 million ($31.46 million) as of June 30, 2022.

Past and Expected Financial Performance

Over the past three years, GME’s revenue increased at a CAGR of 1.3%. During the same period, the company’s total assets grew at a CAGR of 5.7%. However, its levered free cash flow declined at a 2.9% CAGR.

Analysts expect GME’s revenue to decline 2.5% year-over-year to $5.78 billion for the fiscal year ending January 2024. Moreover, the company’s loss per share for the ongoing year is estimated to come in at $0.02.

Over the past three years, BWMX’s revenue rose at a CAGR of 48.5%. Over the same duration, the company’s total assets and levered free cash flow increased at CAGRs of 59.5% and 38.6%, respectively.

For the fiscal year ending December 2023, BWMX’s revenue is expected to increase 17.7% year-over-year to $737.19 million. The company’s EPS for the current year is expected to come in at $1.42, up 28% from the previous year.

Valuation

In terms of trailing-12-month Price/Sales, GME is trading at 0.72x, 15.3% lower than BWMX, which is trading at 0.85x. Moreover, GME’s trailing-12-month EV/Sales of 0.62x is 50% lower than BWMX’s 1.24x. However, GME’s trailing-12-month Price/Cash Flow of 13.77x compares with BWMX’s 3.9x.

Profitability

GME’s trailing-12-month revenue is 7.7 times what BWMX generates. However, BWMX is more profitable, with a trailing-12-month gross profit margin of 71.39%, compared to GME’s 23.82%.

Additionally, BWMX’s trailing-12-month EBITDA margin and net income margin of 18.85% and 5.81% compare to GME’s EBITDA margin and net income margin of negative 1.65% and 1.72%, respectively.

POWR Ratings

GME has an overall rating of D, which equates to a Sell in our proprietary POWR Ratings system. Conversely, BWMX has an overall rating of A, translating to a Strong Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. GME has a C grade for Quality, reflecting its mixed profitability. Its trailing-12-month gross profit margin of 28.82% is 33.4% lower than the industry average of 35.74%, whereas its trailing-12-month levered FCF margin of 6.57% is 28.4% higher than the 5.12% industry average.

In contrast, BWMX has an A grade for Quality, in sync with its higher-than-industry profitability. Its trailing-12-month gross profit margin and levered FCF margin of 71.39% and 16.84% are 99.7% and 229.1% higher than the respective industry averages of 35.74% and 5.12%.

In addition, GME has a C grade for Sentiment, reflecting its expected bottom-line decline for the current fiscal year. On the other hand, BWMX has an A grade for Sentiment, aligning with positive analyst estimates.

Of the 43 stocks in the Specialty Retailers industry, GMW is ranked #39, while BWMX is ranked first.

Beyond what we’ve stated above, we have also rated both stocks for Growth, Value, Momentum, and Stability. Click here to view GME’s ratings. Get all BWMX ratings here.

The Winner

Given the industry’s favorable trends, specialty retailers GME and BWMX are strategically positioned for growth. However, BWMX's superior financial performance, higher profitability, and stronger growth track record make it the preferred investment over GME.

Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy. View all the top-rated stocks in the Specialty Retailers industry here.

What To Do Next?

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GME shares fell $0.04 (-0.29%) in premarket trading Thursday. Year-to-date, GME has declined -25.73%, versus a 10.40% rise in the benchmark S&P 500 index during the same period.

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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