Are These 3 Specialty Retailer Stocks a Buy or Sell Before Christmas?

The specialty retailer industry is thriving amid the improving economic environment, generating healthy GDP growth, reduced concerns about inflation, and high levels of consumer spending. However, a growing number of analysts are losing hope that consumer spending will sustain itself in the following year.

Against this backdrop, it could be prudent to scoop up shares of fundamentally robust Barnes & Noble Education, Inc. (BNED) for potential gains. Meanwhile, it seems wise to steer clear of fundamentally weak stocks GameStop Corp. (GME) and Wayfair Inc. (W) at present. Before delving into the featured stocks, let's examine the industry dynamics.

For the 12-month period that ended in November, the inflation gauge, which tracks changes in prices for a variety of goods and services, tipped slightly downward to 3.1%. The latest CPI report mostly affirmed economists' expectations, providing further evidence that high inflation is very slowly but steadily subsiding.

Consumer confidence reached a five-month high in December, with Americans becoming more optimistic about present and future business conditions, as well as the labor market. The Conference Board reported a surge in confidence that was observed in all age categories and family income levels.

According to a Gallup poll, Americans now think they will spend an average of $975 on Christmas or other holiday gifts this year, up from the $923 average expenditure prediction made in October. The revised holiday spending prediction of $975 indicates that holiday sales may rise by 6% to 9% this year, based on Gallup's modeling.

Increased consumer spending would stimulate the specialty retailer sector, resulting in increased sales and revenue. Concurrently, the specialty retailer industry also stands to gain significantly from the burgeoning realm of personalization, propelled by advancements in artificial intelligence and machine learning.

This evolution is expected to enable retailers to deliver tailored shopping experiences, crafting precise product recommendations and resonant content. Looking ahead, the global specialty retailers market is expected to reach $42.70 billion by 2031, growing at a CAGR of 4%.

However, despite the fact that consumers have proven to be very resilient in the face of persistent inflation and high borrowing prices, some analysts are becoming less and less optimistic that consumer spending will continue into the upcoming year.

Equity strategists Gina Martin Adams and Michael Casper of Bloomberg Intelligence reported that over the last twelve weeks, sell-side analysts have reduced their profit expectations for the S&P 500 consumer discretionary sector through the third quarter of next year.

Considering this outlook, let’s look at the fundamentals of the three Specialty Retailers stocks.

Stock to Buy:

Barnes & Noble Education, Inc. (BNED)

BNED operates college and university bookstores, offering new and used print textbooks, digital textbooks, and publisher-hosted digital courseware. It sells and rents through physical and virtual stores, as well as directly to students via Textbooks.com. The company's segments include Retail and Wholesale.

On May 15, BNED unveiled the prospective launch of First Day® Complete at Emporia State University. The Hornet Textbook Bundle ensures day-one student preparedness, cultivates academic success, and establishes a cost-effective and convenient channel for course material acquisition.

The strategic initiative could position BNED for heightened revenue streams, showcasing its commitment to pioneering solutions in the education sector and fortifying its leadership in the market.

In terms of forward EV/Sales, BNED is trading at 0.36x, 71.1% lower than the industry average of 1.26x. Its forward Price/Sales of 0.04x is 95.5% lower than the 0.93x industry average.

For the fiscal 2024 second quarter that ended October 28, 2023, BNED’s total sales marginally increased year-over-year to $610.38 million. Its adjusted EBITDA grew 26.1% from the year-ago value to $49.64 million. Also, the company’s adjusted earnings rose 19.2% year-over-year to $29.13 million, while EPS increased 9.5% from the prior year’s period to $0.46.

Analysts expect BNED’s revenue to increase 2% year-over-year to $1.57 billion for the fiscal year ending April 2024. Likewise, the company’s revenue for the next fiscal year (ending April 2025) is estimated to grow 2.9% from the prior year to $1.62 billion. Also, the company surpassed the consensus revenue estimates in three of four trailing quarters.

Shares of BNED have gained 8.8% over the past three months to close the last trading session at $1.24.

BNED’s positive fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

BNED has an A grade for Growth and a B for Sentiment. It is ranked #11 out of 44 stocks within the Specialty Retailers industry.

In addition to the POWR Ratings I’ve highlighted, you can see BNED’s Value, Momentum, Stability, and Quality ratings here.

Stocks to Avoid:

GameStop Corp. (GME)

GME delivers gaming and entertainment products. It retails new and pre-owned gaming platforms, accessories, software, in-game digital currency, digital downloadable content, and full-game downloads. Additionally, it offers collectibles and partakes in digital asset wallet and NFT marketplace activities.

In terms of trailing-12-month EV/Sales, GME is trading at 0.84x, 32.6% lower than the industry average of 1.25x. In addition, the stock’s trailing-12-month Price/Sales of 0.95x is consistent with the industry average of 0.95x.

For the third quarter that ended October 28, 2023, GME’s adjusted net income came in at $1 million, compared to a loss of $93.40 million in the prior year’s quarter. Its cash inflow from investing activities amounted to $5.10 million, compared to a cash outflow of $249.60 million in the previous year’s quarter.

Moreover, as of October 28, 2023, the company’s cash and cash equivalents amounted to $909 million, compared to $803.80 million as of October 29, 2022.

Analysts expect GME’s revenue to decrease 7.3% year-over-year to $5.50 billion for the fiscal year ending January 2024. Similarly, the company’s revenue for the next fiscal year (ending January 2025) is estimated to decline 4.5% from the previous year to $5.25 billion. Over the past six months, the stock has slumped 31.1%, closing the last trading session at $16.93.

GME’s bleak outlook is apparent in its POWR Ratings. The stock has an overall rating of D, which equates to a Sell in our proprietary rating system.

GME has a D grade for Value and Stability. It has ranked #36 out of 44 stocks within the same industry.

Click here to access additional GME ratings for Growth, Sentiment, Quality, and Momentum.

Wayfair Inc. (W)

W specializes in e-commerce, offering around 40 million home products across various brands. The company provides online assortments of furniture, décor, housewares, and home improvement items through platforms such as Wayfair, Joss & Main, AllModern, Birch Lane, Perigold, and Wayfair Professional.

In terms of forward EV/Sales, W is trading at 0.88x, which is 29.9% lower than the industry average of 1.26x. Furthermore, its forward Price/Sales of 0.65x is 29.5% lower than the 0.93x industry average.

W’s net revenue increased 3.7% year-over-year to $2.94 billion for the third quarter that ended September 30, 2023. Its gross profit grew 11.3% from the year-ago value to $917 million. Also, the company’s adjusted EBITDA amounted to $100 million, compared to a loss of $124 million in the prior year’s period.

The consensus revenue estimate of $12.04 billion for the fiscal year ending December 2023 reflects a 1.5% year-over-year decline. Moreover, the company is expected to report a loss per share of $1.22 for the year. The stock plunged 3% intraday, closing the last trading session at $64.70.

W’s poor prospects are reflected in its POWR Ratings. The stock has an overall rating of D, which translates to a Sell in our proprietary rating system.

W has a D grade for Quality and Stability. It is ranked #35 out of 44 stocks within the Specialty Retailers industry.

Click here to access the additional W ratings (Growth, Value, Sentiment, and Momentum).

What To Do Next?

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W shares were trading at $65.83 per share on Thursday afternoon, up $1.13 (+1.75%). Year-to-date, W has gained 100.15%, versus a 24.69% rise in the benchmark S&P 500 index during the same period.

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.

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