Many brands in the entertainment and retail industries have been knocked down over the last year as this uncertain economy moves along. But the headwinds of lower consumer spending and inflation will eventually fade and turn into tailwinds that send many of these discounted stocks soaring, maybe even doubling in price over the next five years.
Three Motley Fool contributors were asked to make the case for Williams-Sonoma (WSM 0.17%), Live Nation Entertainment (LYV 1.51%), and Children's Place (PLCE 3.50%) being among the winners going forward. Here is what they had to report.
The housing market will come back
Jennifer Saibil (Williams-Sonoma): Many consumer brands felt the impact of elevated inflation over the past couple of years. Counterintuitively, when revenue and profits declined for some of these brands, it marked an opportune time to make a long-term investment in the best of them. Investors are right to pass over a company that's struggling because of its own ineptitude. But if it's struggling due to temporary external headwinds, the company's performance and the stock price are likely to reflect that when those headwinds ease.
Williams-Sonoma sales dropped 12% year over year in the fiscal 2023 second quarter (ended July 30) and earnings per share dropped from $3.92 to $3.14. Operating margin fell from 17.1% to 14.6%. However, that margin was still well above pre-pandemic levels.
Some positive results were a 16% decrease in inventory as management moderates the business to meet lower demand, and more than $1 billion generated in free cash flow. Management remains positive about the future, and it reiterated its guidance for operating margin to stay above 15% in the long term.
And the long-term outlook does indeed look strong. The company owns a portfolio of high-margin housewares and furniture brands that attract an affluent clientele. When the economy is in growth mode, these brands perform well. The housing market is suffering due to rising interest rates, but when it rebounds, Williams-Sonoma should pick up where it left off. Sales of its eponymous brand were about flat year over year, and the diversity of brand assets typically shields the company from any one of them underperforming.
Williams-Sonoma's stock price is up 41% this year. That outpaces the broader market despite the financial metric declines because smart investors sense the opportunity. Even at this price, the stock trades at a price-to-earnings ratio of 11, which is cheap for a stock that could soar. Historically, Williams-Sonoma stock has outperformed the S&P 500 by a wide margin, and it more than doubled over the past five years. When the housing market stabilizes, it's likely to do it again.
A bargain entertainment stock
John Ballard (Live Nation Entertainment): Over 121 million people attended a concert hosted by Live Nation last year. It's the best stock to capture the growing popularity of live experiences, which has fueled Live Nation's stock to market-beating returns over the last decade and should continue to do so.
Despite the pandemic and high inflation, Live Nation's revenue and net profit have roughly doubled over the last five years, sending the stock up 77%. The company operates Ticketmaster, the leading ticketing brand, and earns revenue from sponsorships, food and beverage sales, and merchandise sales at venues.
It experienced surging demand coming out of the pandemic, but the company continues to defy Wall Street's expectations. Not only did revenue jump 27% year over year in the second quarter, but management is outperforming expectations where it counts. Earnings grew 55% year over year, while the company is even better at converting revenue into free cash flow, which has climbed over 300% in the last three years.
The run isn't over. The company is on track for record attendance in 2023, with over 117 million tickets sold year to date, up 20% year over year. A pipeline of more shows sets up more growth in 2024. However, the company's strategy is also aimed at driving higher profitability per attendee, which is fueling robust growth in earnings.
The market seems to be undervaluing the growing popularity of live music and Live Nation's ability to monetize it. With the stock trading at a modest price-to-free-cash-flow multiple of 14, a combination of more business growth and a higher valuation could deliver a double to investors by 2028.
Retail will recover
Jeremy Bowman (Children's Place): It's been a brutal year or two for retail stocks. Coming out of the pandemic, consumer spending shifted away from discretionary products like apparel and electronics, moving instead toward services like travel and restaurants that were off-limits during the pandemic.
Inflation only exacerbated the impact on retailers, and one of the victims has been Children's Place, the country's largest specialty retailer of children's apparel. The stock trades down 30% over the last year and 69% over the last two years.
However, a bottom in the stock is likely close, if it isn't already in. The challenges buffetting the stock, including the slowdown in consumer spending and recessionary fears, are temporary, and the company is making changes to take advantage of a more favorable macro environment.
Through a combination of selective layoffs and the closing of underperforming stores, Children's Place has steadily slimmed down its store base in recent years. In its second quarter, it reported that 51% of its retail sales came from its e-commerce channel, which should help it bring in higher margins when it returns to growth.
While sales are expected to decline in the second half of the year, the company is aiming to finish the year with about $1 in earnings per share (EPS), though that has the potential to go much higher. In fact, analysts see adjusted EPS topping $4 in the next fiscal year as the macroeconomic environment is expected to normalize, and the company should be able to deliver growth from there.
Considering the stock is trading at a forward P/E of just above 6 based on those estimates, it doesn't seem unreasonable for the stock to double in the next five years if the economy is healthy and profits continue to grow.
