Grading Three Retail Stocks That Have Momentum and Estimates on the Rise
This week, I use AAII’s A+ Stock Grades to give you insights into three retail stocks with upward earnings revisions, attractive profitability and strong price momentum: Williams-Sonoma Inc. (WSM), Zumiez Inc. (ZUMZ) and 1-800-Flowers.com (FLWS).
Screening for Black Friday Retail Stocks
Black Friday is almost here. The holidays are the most important period of the year for retailers, and stores want to maximize sales in what has been a challenging year for many in the industry. Of course, this year will be different because of the pandemic. Studies show that more consumers are planning to shop online on Black Friday this year than in stores.
Retailers have been publicizing Black Friday deals far in advance of the Friday after Thanksgiving, hoping to pull shopper demand forward and avoid crowded stores. The nation’s largest retailers decided to move the biggest deals online to reduce crowds and spread out the season amid the coronavirus pandemic.
The coronavirus pandemic has upended consumer shopping, accelerating the trend toward e-commerce and turning the focus of people’s spending to their homes and even autos. For this article we turn our focus to retail stocks. There are 172 exchange-listed retail stocks in AAII’s Stock Investor Pro, scattered across nine industry segments including apparel, auto, computer, drug, home furnishing, home improvement, discount, department and specialty.
To find the top retail stocks with upward earnings revisions, attractive profitability and strong price momentum, we created a special screening filter. The first filter required passing companies to have a weighted relative strength price rank of 60% or higher. The weighted relative strength examines price momentum over the last year but gives emphasis to the performance over the most recent 13 weeks. Stocks with strong price momentum tend to continue outperforming the market.
Next, the retail stocks screen required upward revision over the last three months in the consensus earnings estimate for the current and next fiscal year, highlighting firms with improving prospects. The table below lists the expected earnings per share estimate for the current and next fiscal year and indicates the percentage improvement of each estimate over the last three months.
The special retail stocks screen also sought out companies with gross margins higher than the median for their industry group. This ratio reflects the pricing decisions of a company as well as the costs of purchasing merchandise. It is the ratio of the gross income of a company (sales less cost of goods sold) to its sales for the same period. The higher the gross margin and the more stable it is over time, the greater the company’s expected profitability.
Finally, the retail stocks screen required that the inventory turnover ratio be equal to or better than the median for the industry. It is the ratio of cost of goods sold to average inventory. This ratio approximates the number of times inventory is used and replenished over the course of the reporting period, which is 12 months for our analysis. A higher ratio indicates that inventory does not languish in warehouses or on store shelves.
Seven companies made the retail stocks screen list, and they are ranked by relative price strength. The quick ratio is listed in the table to provide a simple measure of financial liquidity. The quick ratio adds cash and accounts receivable from the balance sheet and divides that figure by current liabilities — higher figures are better. The price-to-sales ratio gives an indication of the valuation levels of the stocks making the retail stocks screen list.
Three Retail Stocks to Consider for Your Black Friday Wish List
The coronavirus pandemic has shifted the way most consumers approach shopping. Certain companies have been clear beneficiaries of the coronavirus pandemic, as consumers’ behaviors have changed, and people stayed close to home.
Of the seven retail stocks we identified with upward earnings revisions, attractive profitability and strong price momentum, let’s evaluate Williams-Sonoma, Zumiez and 1-800-Flowers.com using AAII’s A+ Stock Grades to determine how attractive the three retail stocks are based on their fundamentals today.
AAII’s A+ Stock Grades is a stock-grading system based on percentile rankings of multiple key metrics within five investment factors: value, growth, momentum, earnings estimate revisions and quality. The A to F grades for each factor give summary ratings on a company’s fundamentals.
The following table summarizes the stock grades for Williams-Sonoma, a specialty retailer selling high-quality home products; Zumiez, a provider of apparel, footwear, accessories and hard goods for teenagers and young adults; and 1-800-Flowers.com, a retailer of fresh-cut flowers, floral and fruit arrangements and gift baskets.
What the A+ Stock Grades Reveal
Williams-Sonoma is a specialty retailer of high-quality home products. The company markets a wide selection of merchandise through its retail stores and websites under the brands Williams Sonoma (cooking and entertaining essentials), Pottery Barn (casual home furnishings), Pottery Barn Kids (stylish children’s furnishings), Pottery Barn Bed + Bath, PBteen, West Elm (affordable home furnishing goods), Rejuvenation and Mark and Graham.
The company has established a solid niche in the fragmented $120+ billion domestic home furnishings market, capturing approximately a 5% market share. Its well-known brands have been key factors in supporting the company’s top- and bottom-line growth, due to repeated business from loyal customers. However, there is plenty of room for growth; there are few large competitors in the kids and teen space. The company has leveraged its e-commerce assets such that its e-commerce business accounts for a majority of total revenue.
Williams-Sonoma has a very positive A+ Estimate Revisions Grade of A, which is based on the magnitude of a company’s last two earnings surprises, using the SUE (standardized unexpected earnings) score, and the percentage change in the consensus estimate for the current fiscal year over the last month and last three months.
With its stock up over 46% for the year, Williams-Sonoma has a Value Grade of C, based on its score of 47, which is considered average. The company’s Value Score ranking is based on several traditional valuation metrics. The company has a score of 38 for the price-to-sales ratio, 57 for the price-to-free-cash-flow ratio and 82 for the price-to-book-value ratio (the lower the score the better for value).
The company has a B grade when it comes to price momentum based on the weighted four-quarter relative strength. Momentum is based on the price change of a stock over a specified period relative to all other stocks. Williams-Sonoma has a strong A+ Growth Grade of B, which looks at growth in sales, diluted earnings per share from continuing operations and operating cash.
Zumiez is a specialty retailer of apparel, footwear, accessories and hardgoods for young men and women through the fashion, music, art and culture of action sports, streetwear and other lifestyles. The company operates under the names Zumiez, Blue Tomato and Fast Times.
It offers various categories of shoes — such as skate shoes, casual shoes, high tops, sandals, slip-ons, runners and boots — and shoe accessories, such as socks. It also offers flannels, hoodies, baseball hats, windbreakers, t-shirts, jackets, jerseys, sweaters, tank tops, sweatshirts, cardigans, skirts, jeans, joggers, leggings and dresses, among others. It provides various accessories, including watches, sunglasses, bracelets, earrings, rings, beanies, hats, belts, wallets and phone accessories.
Zumiez has a strong A+ Growth Grade of B, which looks at quarterly year-over-year growth in sales, diluted earnings per share from continuing operations and operating cash, as well as annualized growth over the last five years for these three elements. The company saw operating cash increase by over 214% for its latest quarter versus one year ago.
The company has a Value Grade of A, based on its score of 18, which is in the deep value range. The Value Grade is the percentile rank of the average of the percentile ranks of the price-to-sales ratio, price-earnings ratio, enterprise-value-to-EBITDA (EV/EBITDA) ratio, shareholder yield, price-to-book-value ratio and price-to-free-cash-flow ratio.
The A+ Quality Grade is based on having a ranking for at least four of eight quality measures — return on assets (ROA), return on invested capital (ROIC), gross profit relative to assets, buyback yield, change in total liabilities to assets, management’s use of accruals, Z double prime bankruptcy risk (Z) score and F-Score. Stocks receive better grades for having higher scores for the quality sub-components.
Zumiez has a Quality Score of 96, which is very strong and translates to a Quality Grade of A. The company’s return on assets is 6.8%, which contributes to its very strong Quality Grade.
1-800-Flowers.com is a provider of gourmet food and floral gifts for all occasions. The company offers gifts for every occasion, including fresh flowers and a selection of plants, gift baskets, gourmet foods, confections, candles, balloons and stuffed animals. The company operates through three business segments: consumer floral, gourmet food and gift baskets and BloomNet wire service.
The consumer floral segment includes the operations of the company’s flagship brand, 1-800-Flowers.com, FruitBouquets.com and Flowerama. The gourmet food and gift baskets segment includes the operations of Harry & David (which includes Wolferman’s, Moose Munch and Stockyards.com), Cheryl’s (which includes Mrs. Beasley’s), The Popcorn Factory, DesignPac, Shari’s Berries and 1-800-Baskets. The BloomNet wire service segment includes the operations of BloomNet and Napco.
The company has a Value Grade of C, based on its score of 47, which is considered average. The Value Grade is the percentile rank of the average of the percentile ranks of several traditional valuation ratios.
The company has a strong A+ Growth Grade of B, which looks at several components that consider a company’s success in growing its sales, earnings per share and operating cash on a year-over-year basis for the latest reported fiscal quarter and on an annualized basis over the last five years. The company saw sales increase by over 51% for its latest quarter versus one year ago.
The company has a B grade when it comes to price momentum, based on the weighted four-quarter relative strength. Momentum is based on the price change of a stock over a specified period relative to all other stocks. It is considered to be an anomaly in the analysis of stock returns because stocks with high relative levels of momentum tend to continue to outperform, while stocks with low relative levels of momentum tend to continue underperforming.
The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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