Big changes are sweeping the retailing industry today, and the shifts are creating a premium for the strongest, most nimble companies. Identifying these winners is a challenge for investors, though, since temporary sales trends can often give a false sense of long-term stability.
With that in mind, Motley Fool investors scoured the industry for examples of retailers that boast attractive long-run growth opportunities. Read on to find out why Five Below (NASDAQ:FIVE), lululemon (NASDAQ:LULU), and Boot Barn (NYSE:BOOT) topped that list.
One way to beat Amazon
Jeremy Bowman (Five Below): The past few years haven't been so kind to retailers as the rise of e-commerce has threatened the traditional brick-and-mortar storefront, forcing thousands of store closures in what some have dubbed the "retail apocalypse."
However, a handful of retailers have been able to thrive in spite of this climate as their models are not easily transferred to the online channel. One of those is Five Below, a chain that sells only items for $5 or less with merchandise like toys, games, gifts, books, and candy, targeting teens and other bargain-minded shoppers looking for fun, whimsical merchandise. Such items are often too cheap to justify shipping or designed for impulse-buying that works best in strip malls and physical locations.
That formula has been an undeniable success for the company so far. The stock has doubled following a surge after its recent earnings report, and has nearly quadrupled since its 2012 IPO. In the recent quarter, sales jumped 27.2% to $296.3 million on 3.2% comparable sales growth and strong new store performance. Operating income nearly doubled in the period to $24.7 million as margins continue to improve, and earnings per share jumped from $0.15 to $0.35 in part due to a lower tax rate from tax reform.
For the full year, management expects earnings per share to increase by about a third to $2.42 to $2.48, and over the long term it sees an opportunity to quadruple its store base to 2,500. That should ensure continued growth for the coming years, especially as the company's model seems to make it recession-proof.
A flexible business model
Demitri Kalogeropoulos (Lululemon): Few companies understand the risks of stumbling in the apparel business as well as Lululemon does. The yoga-inspired clothing specialist faced a sharp sales growth contraction and plunging profit margins in connection with quality control problems that ultimately led to a shakeup in its management team.
But those problems are now firmly in the rear-view mirror. The retailer last posted a healthy 19% sales spike that, along with improving profitably, helped both revenue and earnings surpass management's first-quarter guidance by a wide margin.
The latest trends suggest Lululemon will pass $3 billion in annual sales this year even as gross profit margin climbs closer to its all time high of 57% of sales. The company will need to release a steady string of high-quality merchandise this year, and keep that winning streak going into 2019 for a shot at achieving its $4 billion annual sales goal by 2020. But, with customer traffic holding up well in its physical stores, and with its booming online sales channel delivering strong profits, this retailer is well positioned to expand its reach to more of its core female customers -- and out into new niches like men's fitness.
Hit the ground running with Boot Barn
Steve Symington (Boot Barn): Boot Barn might not be the first company many investors think of in the retail space, but the Western work wear and apparel retailer is making all the right moves to reward patient shareholders.
To be sure, Boot Barn stock has already tripled over the past year, helped by a hefty post-earnings pop last month when the company posted double-digit percent growth in same-store sales both online and in physical retail locations. The company credited strength in its higher-margin exclusive brands, as well as its ability to maintain a full-price selling model where many customers' work-related purchases are often non-discretionary. The latter is a happy consequence of recent blue-collar job growth given the government's push for higher infrastructure spending.
In the coming year, Boot Barn plans to reaccelerate store expansion while making additional investments in those exclusive brands and the e-commerce side of the business. If it can sustain its momentum along the way, I think the stock has plenty of room to run from here.
Demitrios Kalogeropoulos has no position in any of the stocks mentioned. Jeremy Bowman has no position in any of the stocks mentioned. Steve Symington owns shares of Lululemon Athletica. The Motley Fool recommends Five Below and Lululemon Athletica. The Motley Fool has a disclosure policy.