It's the time of year when students say goodbye to their much-loved summer vacations and say hello to classes again. Not only does this annual event have implications for pupils, parents, and teachers, but it also provides certain public companies with a lucrative business boost.
A team of Motley Fool contributors have identified three top stocks for the fall back-to-school season. Read on to see why Five Below (FIVE -0.17%), Mondelez International (MDLZ -0.38%), and Target (TGT -0.71%) all make solid investments right now.
Crushing discount-store rivals
Neil Patel (Five Below): With a stock that has outperformed larger peers Dollar General and Dollar Tree over the past year, Five Below is a discount-store chain you want to add to your back-to-school shopping list.
Five Below has built a reputation of selling quality products at bargain prices, mainly for girls and boys ages eight to 14 years old and their parents. The business offers up a treasure hunt shopping experience, with items ranging from home décor and tech gadgets to toys and beauty products. Prices are usually from $1 to $5, but some products can be as "expensive" as $10.
Apparel is a key back-to-school category that Five Below is doing well at right now. "Our merchandising team sourced some great value products like denim jackets, flannel shirts, and backpacks for the new school year. We are very pleased with our performance through August," said CEO Joel Anderson on the recent earnings call. But with a wide assortment of school supplies as well, Five Below can really be an important destination for many shopping needs.
The business has been growing rapidly over the years, more than doubling its store count from the end of fiscal 2016 to today. But don't think that this impressive expansion is over. Management firmly believes that Five Below can one day operate 2,500 locations in the U.S. That's up significantly from 1,121 stores today.
Revenue of $647 million in the most recent quarter (Q2 2021) is 55% higher than the same period in 2019 (for a pre-pandemic comparison). And same-store sales (or comps) during that time soared 21%, a figure most any retailer would be envious of, particularly after the pandemic's negative impact on the industry. Further supporting Five Below's stellar financial metrics is a balance sheet with zero long-term debt, providing safety in adverse economic times.
The stock is down more than 20% over the past couple weeks primarily because of a disappointing earnings report, but don't worry. The long-term growth story is still clearly intact for this discount retailer. Use the recent pullback to add Five Below's stock to your shopping bag.
The perfect lunchbox stock
Eric Volkman (Mondelez International): Back to school means back to kids' lunchboxes. And kids' lunchboxes mean snacks. Finally, very often in this world, snacks mean Mondelez International, one of the biggest players in that segment of the food industry.
If you're an American consumer, it's almost certain that you've eaten one of Mondelez's products -- or perhaps even have a few in your pantry at this very moment. The company has an impressive portfolio of brands that cut across traditional snack categories, including Oreo and Chips Ahoy! cookies, Ritz and Triscuit crackers, and Toblerone chocolate.
Mondelez, a tireless acquirer of assets, has built up that portfolio by plowing money into new assets. In May, for example, the company closed a $2 billion deal for European croissant and baked snacks specialist Chipita. That, by the way, was the fourth Mondelez acquisition in the first half of 2021 alone.
The coronavirus pandemic helped lift the company's results, as consumers stuck in their homes spent more money on comfort snack food such as Oreos and Ritz crackers. In its latest reported quarter, Mondelez managed to grow its net revenue by 12% on a year-over-year basis, with non-GAAP (adjusted) net income coming in 8% higher.
It seems the company believes the "coronavirus effect" on its fundamentals will cool down; for the entirety of 2021 it's guiding for 4% in organic net revenue growth, and an adjusted per-share earnings improvement in the high-single-digit percentages. I feel Mondelez might be underestimating the lasting effects of the coronavirus; comfort foods have a way of staying on shopping lists once they're rediscovered.
Mondelez is also estimating that its free cash flow will be over $3 billion. This gives it the financial fuel to help pay for those acquisitions, and to fund its dividend. Since effectively coming into existence (hived off from the former Kraft Foods) in 2012, Mondelez has paid a dividend in every quarter and raised it once per year. Across that stretch of time, it has risen from $0.13 per share to the present $0.35, for a yield of 2.3%.
So it's basically a fine dividend stock with clear potential for growth thanks to its strong brand lineup and well-considered acquisitions. It certainly deserves a place in any investor's pantry.
A one-stop shop
Jeremy Bowman (Target): The coronavirus pandemic spoiled back-to-school in 2020, but this year consumer-facing companies of all stripes are eager to capitalize on the return to school.
Arguably, none is better positioned than Target. The big-box chain has thrived over the last year thanks to its same-day fulfillment services, diverse product selection, and its omnichannel model offering a hybrid of in-store and online shopping.
Back-to-school is usually a bright spot for Target as it's well positioned to sell apparel, accessories, electronics, and school supplies as well as home goods for college students arriving on campus. The retailer's assortment of owned brands, which has been a bright spot for the company recently, also gives it an advantage over its retail peers, as many of the products that draw in Target customers are unique. For example, the company just launched a collaboration with popular children's book author Christian Robinson.
On the recent earnings call in August, management said that back-to-school and back-to-college are "off to a great start," and the company has introduced a feature in its app called School List Assist, helping users easily find all the school supplies they need.
Target is also better positioned than competitors like Amazon and Walmart to convert those sales into profits. The company's retail business produces higher operating margins than those two rivals, thanks to Target's focus on owned brands and its strategy of fulfilling most of its online sales through its stores. This is much more cost-effective, and often faster, than shipping them to the customer.
Finally, even after a strong run during the pandemic, Target shares look cheap, trading at a price-to-earnings ratio under 20. For a retailer forecasting high-single-digit comparable sales growth for the back half of the year, that looks like a great price.