Retail was already in shambles before the pandemic, and the global crisis decimated many companies that were forced to close. But a reopened economy has proved bricks-and-mortar retailers are not dead.
Whether you call it pent-up demand or "revenge shopping," many retailers had a fantastic 2021 as consumers returned to their favorite stores and shopped till they dropped again.
E-commerce is still a growing phenomenon accounting for over 14% of the $4.5 trillion in total U.S. retail sales last year, but physical retail remains an important component of everyday purchases with Digital Commerce 360 estimating offline sales grew at a record 14% rate. That's a major reversal from 2020, and investors might just want to consider looking more closely at this space once again as there are tailwinds pushing some of the best retailers higher.
The following stock could just be one of the biggest winners of 2022.
A significant opportunity
Menswear has not been an area ripe for investment in years, and the COVID-19 outbreak sent the likes of Tailored Brands (the owner of Men's Wearhouse and Jos. A. Bank), Brooks Brothers, and J.C. Penney scrambling for the protection of the bankruptcy courts.
Although big and tall men's retailer Destination XL (DXLG 2.98%) was also slammed by the pandemic -- it voluntarily delisted from the Nasdaq exchange in 2020 after it couldn't keep its stock above $1 per share -- it used the time afterward to shore up its finances and put itself back on track.
But just one year later and Destination XL is growing sales, producing profits, and finding itself financially fit.
Full-year sales were $505 million in 2021, up 6.5% compared to 2019 on a better-than 14% gain in comparable sales. And where it reported a net loss of $7.8 million, or $0.16 per share two years ago, Destination XL notched a $56.7 million profit this past year, with adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) three times greater than two years prior.
More importantly, the retailer has no debt today, having paid off the $74 million in long-term and credit-facility borrowings it had a year ago.
Doing one thing and doing it well
Certainly, Destination XL has benefited from the unusual market conditions that made last year special. Most businesses had their workers return to the office. Weddings and other special occasions that had been canceled during the lockdown portion of the pandemic were rescheduled. And travel was back on the calendar, giving male consumers new opportunities to refresh their closets.
Yet there's good reason to believe the big and tall male retailer can continue the path it's currently on even as we've settled into our old routines again.
Destination XL intends to make stealing market share a priority in 2022. The company targets a niche often neglected by most mall retailers -- one that's even more difficult to satisfy than for plus-size women, though Victoria's Secret is making this segment a key component of its new business model.
According to Statista, Walmart (NYSE: WMT) is the leading retailer for the plus-size men's market, and with its broad, national footprint putting it within just a few miles of almost every consumer in the U.S., that's not surprising. But because Destination XL is very narrowly focused on just one segment, it has a chance to continue taking share from Walmart, Kohl's, J.C. Penney, and others.
New-to-file customers -- or the new, first-time customers who shop its stores -- grew 27% last year, and though the acquisition rate slowed down in the fourth quarter, the retailer reports it was up over 43% again in February.
Ready to fill out its valuation
Destination XL is very cheap at the moment with the stock down 45% from its 52-week high. It trades for just 6 times trailing earnings, 5 times next year's estimates, a fraction of its estimated earnings growth rate (that Wall Street pegs at 15% annually for the next five years), and at a minuscule 4 times the free cash flow it produces.
Admittedly, apparel retailers aren't the sexy sort of stocks many growth investors are interested in, but if you're looking for a company that ought to actually produce outsize returns in 2022 and beyond, you just might want to try Destination XL on for size.