Video Game retailer GameStop, Inc. (GME) is famous for kickstarting the “meme” stock frenzy, popularized by the Reddit community Wallstreetbets. GME was targeted primarily by retail investors earlier—who overlooked the company’s surmounting debt, unstable financials and inadequate cash flows—because it was heavily shorted by hedge funds. Shares of GME have soared 4,219.6% over the past year, and 1034.9% year-to-date. In fact, the short squeeze has caused a $4.50 billion loss by hedge funds so far this year.
However, the current market volatility and rising inflation are causing investors to focus on stocks that could offer relatively steady returns. Analysts expect GME to hit $70 soon, indicating a potential 67.35 decline from its last closing price of $213.82. Big-short investor Michael Burry recently warned retail investors regarding an impending “Mother of all Crashes” through a now-deleted Twitter post.
Given this backdrop, we think meme stock GME is best avoided now. However, many retail companies are regaining traction amid the fast-paced economic recovery as consumers opt for in-person shopping over e-commerce purchases following more than a year of social distancing. As such, established mall-based retailers, The Gap, Inc. (GPS - Get Rating), and Foot Locker, Inc. (FL - Get Rating) have reported impressive year-over-year earnings growth in their last reported quarters and we think are poised to grow further in the coming quarters. So, it could be wise to bet on these stocks now.
The Gap, Inc. (GPS )
GPS is an established apparel retail company that operates internationally. As of May 1, the company had 3,571 stores in locations worldwide. The company operates through its retail store chain, third-party stores and arrangements, and online website. GPS has an ESG Risk score of 13, which places it in the 5th percentile, indicating relatively low unmanaged ESG risk.
On May 27, GPS partnered with Walmart, Inc. (WMT) to launch its new brand of home essentials, Gap Home, through WMT’s ecommerce platform. Given WMT’s dominance in the retail space, this collaboration is expected to boost GPS’ new product line sales. Also, GPS’ brand Athleta is expected to expand its operations to Canada this year, a move that is aligned with the company’s aim to double its business by 2023.
On April 12, GPS resumed its previously announced share repurchase program, under which it aims to buy back $800 million worth outstanding shares. This should boost earnings per share for the existing shareholders.
GPS’ net sales increased 89% year-over-year to $4 billion in the fiscal first quarter ended May 1. This can be attributed to a 28% rise in comparable sales, and an 82% rise in online sales. Its gross profit increased 508.2% from the same period last year to $16.30 billion. Its net income and EPS improved substantially from negative year-ago values to $166 million and $0.43, respectively. And its cash flow from operating activities rose 136.2% from the prior year quarter to $340 million.
A $17.11 billion consensus revenue estimate for the current year indicates a 24% improvement year-over-year. Analysts expect the company’s EPS to rise 182.9% from the same period last year to $1.75 in the current year. GPS has an impressive earnings surprise history also; it surpassed the consensus EPS estimates in three of the trailing four quarters. GPS has gained 186.7% over the past year, and 54.9% year-to-date.
GPS has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Foot Locker, Inc. (FL)
FL is an athletic footwear and apparel retail manufacturer that operates across 27 countries. As of May 1, the company operated 2,952 stores internationally through two segments–athletic stores and direct-to-customers. FL has an ESG Risk Score of 14, which places it in the 7th percentile.
On May 26, FL launched a new basketball inspired capsule collection designed by creative director Melody Ehsani. Melody’s fresh perspectives are expected to provide additional growth opportunities for women’s business at FL.
On April 12, the company partnered with leading edge ecommerce platform FreedomPay to provide secured touchless in-store payments at FL retail stores internationally. This new payment system is expected to boost customer satisfaction substantially, thereby boosting comparable sales in the near term.
For its fiscal first quarter, ended May 1, FL’s total sales came in at $2.15 billion, up 83.1% year-over-year. This can be attributed to an 80.3% rise in comparable-store sales. Its operating income improved 368.6% from its year-ago value to $282 million, while its net income improved 283.6% from the same period last year to $202 million. Its EPS stood at $1.93, representing a substantial improvement from its negative year-ago value.
The Street expects FL’s revenues to come in at $8.57 billion in the current year, representing a 13.5% improvement year-over-year. The company’s EPS is expected to rise 101.8% from its year-ago value to $5.67 in the current year. Shares of FL have gained 95.7% over the past year, and 41.6% year-to-date.
It’s no surprise that FL has an overall rating of A, which equates to Strong Buy in our proprietary rating system. It has an A grade for Growth, Value, Momentum, and Sentiment. FL is ranked #1 of 34 stocks in the A-rated Athletics & Recreation industry.