My regular readers know that I haven't been a fan of the retail sector throughout 2022. This part of the economy is starting to feel the impacts of a very beleaguered consumer who has lost buying power against inflation for 18 straight months now.
Record numbers of Americans are taking second jobs to make ends meet and the personal savings rate is at levels last seen during the financial crisis some 15 years ago. None of this spells good news for consumer confidence or spending.
Therefore, I remain heavily underweight any part of the economy that is dependent on the American consumer. That said, there are exceptions to every rule and sometimes things get so cheap they are tough to ignore. This is especially true if you can establish positions in the beaten down value plays via covered call orders for the additional risk mitigation.
I open an initial position in Solo Brands (DTC) this week. The stock sells for around $4.50 a share. The company should make 90 to 95 cents a share in profit this fiscal year and analyst firms currently project similar performance in FY2023. This means the shares are going for approximately 2.5 times projected EPS over the next two years.
The company is an operator of four outdoor lifestyle brands under primarily a direct-to consumer-platform (over 80% of overall sales). It boasts over three million customers who have bought from it and is best known for its flagship brand, the Solo Stove. It also sells kayaks, paddle boards and other outdoor items. The stock soared during the pandemic as people were forced/chose to rediscover the 'Great Outdoors'. The shares have cratered since fear around Covid has faded. The company did recently lower its sales forecast but should still deliver revenue growth in the mid-teens this year.
I also continue to like Academy Sports and Outdoors (ASO) . It is kind of in a similar niche as Solo Brands as it is full-line sporting goods and outdoor recreation retailer in the United States with over 260 stores in 17 states. It is heavily represented in Texas where it is headquartered as well as some of fastest growing regions in the country, primarily in the South and Southeast. Each store averages around 70,000 square feet, allowing the company to sell a very wide assortment of goods. The company still has plenty of room to grow in the country.
Academy Sports and Outdoors was one of the few retailers that managed to report impressive results in the second quarter, nicely beating on both the top and bottom lines. The company even raised FY2022 earnings guidance, a true rarity this earnings season. Management has done a commendable job reducing debt as well as returning cash flow to shareholders primarily via stock buybacks. The stock had a decent rally off the company's better than expected quarterly results but still trades at just seven times this year's anticipated EPS.
And those are cheap names in a challenged retail sector as we hope to end this trading week on a high note.