The specialty retail industry has registered significant growth in the last two quarters, driven by the faster-than-expected macroeconomic recovery. Rapid job growth and federal stimulus checks have buoyed consumer spending, allowing specialty retail companies to generate a significant improvement in their profit margins.
Approximately $400 billion of fiscal stimulus has been deployed since the American Rescue Plan Act was signed in March. Furthermore, $1.60 billion in fiscal stimulus checks were distributed in the last tranche over the six weeks ended June 21. While weekly unemployment claims rose slightly for the week ended July 17, continuing claims reached a fresh pandemic low of 3.24 million on July 22, indicating a solid job market.
Despite rising concerns regarding the spread of the COVID-19 Delta variant, the U.S. economic recovery is expected to remain on track, given the substantial pent-up demand and savings accumulated during the worst days of the pandemic. Furthermore, with consumer spending accounting for 70% of the U.S. economy, the retail industry should continue growing despite the current market volatility.
Wall Street analysts expect popular specialty retail stocks Petco Health and Wellness Company, Inc. (WOOF), KAR Auction Services, Inc. (KAR), and Conn’s, Inc. (CONN) to gain more than 30% in the near term.
Petco Health and Wellness Company, Inc. (WOOF)
WOOF is a multi-channel pet wellness company that sells premium pet consumables and related services across the United States, Mexico, and Puerto Rico. The company made its stock market debut on January 14. The stock opened at $26 on its first trading session, 44.4% above its $18 pre-IPO price.
WOOF’s revenues increased 27% year-over-year to $1.41 billion in its fiscal first quarter ended March 31. This can be attributed to a 28% rise in comparative sales over this period. Its operating income came in at $47.75 million, up 192% from its year-ago value. Its net income and EPS stood at $6.15 million and $0.03, respectively, reflecting a substantial improvement from the negative prior-year quarter values.
On June 22, WOOF expanded its nutrition assortment to include the extension of its private label brand WholeHearted Plus and veterinary diet offerings True Meals Dog Food, which were developed in partnership with Tyson Pet Products. These healthy food products could be a hit among people with pet dogs.
In its sustainability report published in May, WOOF committed to increasing its sustainable product offerings by 50% by 2025. The company previously launched its sustainability-focused bottle collection “Started as a Bottle,” which upcycled 1.50 million plastic bottles into pet toys. Given the rising popularity of ESG investing WOOF’s sustainability commitment should make it an attractive investment bet among ESG investors.
A $5.54 billion consensus revenue estimate for the current year indicates a 12.5% improvement year-over-year. WOOF’s EPS is expected to rise 171.4% from the same period last year to $0.76 in the current year.
Shares of WOOF have gained 3% over the past five days. The stock has gained 2.8% intraday to close yesterday’s trading session at $20.49.
Of the six Wall Street analysts that rated WOOF, four rated it Buy while one rated it Hold and one rated it Sell. The $27 12-month median price target indicates a 31.8% potential upside from its $20.49 last closing price. The price targets range from a low of $16.00 to a high of $31.00.
KAR Auction Services, Inc. (KAR)
KAR is a specialty retailer that provides used vehicle auctions and vehicle marketing services through two segments: ADESA Auctions and Automotive Finance Corporation (AFC). The company operates in the United States, Canada, Mexico, and Europe.
KAR’s purchased vehicle sales increased 22.8% year-over-year to $92.70 million in the fiscal first quarter ended March 31. Its EBT increased 1,452.1% from the same period last year to $74.50 million. Its net income stood at $50.90 million, up 1,717.9% from the prior-year quarter. And its EPS rose 1,150% from its year-ago value to $0.25.
ADESA launched its proprietary “% to Retail” functionality on May 25. The feature showcases the current bid for all 24/7 bid/buy vehicle listings on the platform. This should allow dealers to determine accurate vehicle pricing. Regarding this, KAR’s Global Chief Commercial Officer and ADESA President John Hammer said, “With the ‘% to Retail’ feature, we’re making it easier and faster for dealers to identify vehicles priced right for their wholesale-to-retail strategy. Our digital marketplaces are expanding the pool of fresh inventory accessible to buyers, and ‘% to Retail’ will help them make better, faster, and smarter bidding and buying decisions.”
Also in May, ADESA launched new condition report capabilities and high-definition vehicle undercarriage photos on condition reports. These features should provide buyers relevant and actionable data, allowing them to make informed bidding and purchase decisions.
Analysts expect KAR’s revenue to come in at $588.80 million in the about-to-be-reported quarter (ended June 2021), indicating a 41.6% rise year-over-year. A $0.19 consensus EPS estimate for its fiscal second quarter represents a 137.5% improvement from the prior-year quarter. Also, KAR has an impressive earnings surprise history; it beat the Street’s EPS estimates in three out of the trailing four quarters.
KAR has gained 19.4% over the past year to close yesterday’s trading session at $16.39.
All four Wall Street analysts that rated the stock have rated it Buy. Analysts expect the stock to hit $24 within the next 12 months, indicating a 44% potential upside from yesterday’s closing price of $16.67. The price targets range from a low of $20.00 to a high of $27.00.
Conn’s, Inc. (CONN)
Specialty retailer CONN offers durable consumer goods and ancillary services to U.S.-based customers. The company operates through two segments—Retail and Credit. As of June 23, the company operated through more than 154 stores located across the United States and its online website.
For its fiscal first quarter ended April 30, CONN’s net sales rose 26.5% year-over-year to $291.30 million. This can be attributed to a 29.9% year-over-year rise in product sales to $269.21 million. Its net income and EPS came in at $45.40 million and $1.52, respectively, representing a significant improvement from the negative year-ago values.
CONN has opened several showrooms across Florida, Alabama, and Orlando over the past six months. These market expansions should strengthen CONN’s foothold as a specialty furniture retailer in the United States.
The Street expects CONN’s revenue and EPS to increase 9.3% and 4,766.7%, respectively, year-over-year to $1.51 billion and $2.92 in the current year. In addition, the company surpassed consensus EPS estimates in each of the trailing four quarters.
CONN has gained 164.7% since hitting its 52-week low of $9.06 on September 17, 2020. In addition, the stock has gained 105.1% year-to-date.
Of the two Wall Street analysts that rated CONN, one rated it Buy while one rated it Hold. The 12-month median price target of $35 indicates a 46% potential upside from yesterday’s closing price of $23.98.
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WOOF shares were trading at $20.24 per share on Thursday afternoon, down $0.25 (-1.22%). Year-to-date, WOOF has declined -31.16%, versus a 17.05% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...
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