In this article, I have assessed two prominent specialty retail stocks, GameStop Corp. (GME) and Upbound Group, Inc. (UPBD), to ascertain the superior long-term investment choice.
But before diving into the specifics of these stocks, let's first explore the economic backdrop and its potential ramifications on the specialty retail sector.
The Personal Consumption Expenditures (PCE) price index, the Fed’s targeted inflation measure, rose to 2.7% for the year ending in March, surpassing economists' expectations of a 2.6% gain. Monthly prices remained steady, with a 0.3% increase, consistent with February's pace. Despite persistently high inflation last month, Americans continue to spend unabatedly.
Additionally, personal income rose by $122 billion (0.5% monthly rate) in March, as per estimates from the Bureau of Economic Analysis. Disposable personal income (DPI) increased by $104 billion (0.5%). Despite high prices, the rise in personal income should bode well for the specialty retail sector.
Additionally, the National Retail Federation expects retail sales to increase by 2.5% to 3.5% in 2024, reaching $5.23 trillion and $5.28 trillion. Furthermore, digital retailing is reshaping the conventional in-store experience through technological integration, promising substantial growth in the specialty retail market in the coming years.
As a result, the global specialty retailers market is expected to reach $42.70 billion by 2031, growing at a CAGR of 4%.
Given this backdrop, let’s compare two Specialty Retailers stocks, GameStop Corp. (GME) and Upbound Group, Inc. (UPBD), to understand why UPBD holds a greater long-term potential for investors.
The case for GameStop Corp.
With a market cap of $5.04 billion, GME is a specialty retailer that offers games and entertainment products through its stores and e-commerce platforms internationally.
GME’s stock has fallen 21.3% over the past nine months and 12.9% over the past year, closing the last trading session at $16.47.
GME’s trailing-12-month gross profit margin of 24.54% is 32.4% lower than the industry average of 36.30%. In addition, the stock’s trailing-12-month EBIT and levered FCF margins of negative 0.60% and 4.09% compare to the industry average of 7.65% and 5.66%.
In terms of forward non-GAAP P/E, GME is trading at 1647x, significantly higher than the industry average of 15.33x. The stock’s forward EV/EBIT multiple of 82.97 is 501.1% higher than the industry average of 13.80.
During the fiscal fourth quarter, which ended February 3, 2024, GME’s net sales decreased 19.4% year-over-year to $1.79 billion. Its gross profit declined 16.1% from the year-ago value to $419.20 billion. Moreover, as of February 3, 2024, its cash and cash equivalents stood at $921.70 million, down from $1.14 billion as of January 28, 2023.
Analysts expect GME’s revenue for the fiscal first quarter (ending April 2024) to decrease 15.5% year-over-year to $1.05 billion. Moreover, its loss per share is likely to amount to $0.09 for the same quarter. Besides, it failed to surpass the consensus revenue estimates in three of the trailing four quarters.
GME’s bleak outlook is reflected in its POWR Ratings. The stock has an overall rating of D, which translates to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
GME has an F for Sentiment and a D for Value, Momentum, and Stability. It is ranked #39 out of 42 stocks in the Specialty Retailers industry.
In addition to the POWR Ratings we’ve stated above, one can access GME’s Growth, Sentiment, and Quality ratings here.
The Case for Upbound Group, Inc.
Valued at $1.68 billion by market cap, UPBD is an omni-channel platform company that engages in leasing household durable goods to customers on a lease-to-own basis in the United States, Puerto Rico, and Mexico. The company operates through four segments: Rent-A-Center Business; Acima; Mexico; and Franchising.
Over the past year, UPBD’s shares have gained 14.6% to close the last trading session at $30.77.
UPBD has been paying dividends to its shareholders for the past three years. Its annualized dividend of $1.48 per share translates to a dividend yield of 4.81% on the current share price, higher than its four-year average yield of 4.02%.
UPBD’s trailing-12-month gross profit margin of 50.22% is 38.3% higher than the 36.30% industry average. The stock’s 31.70% trailing-12-month levered FCF margin is 459.8% higher than the 5.66% industry average.
In terms of forward non-GAAP P/E, UPBD is currently trading at 8.25x, which is 46.2% lower than the industry average of 15.33x. Its forward EV/EBIT multiple of 9.17 is 33.6% lower than the industry average of 13.80.
During the fiscal first quarter that ended March 31, 2023, UPBD reported total revenue of $1.01 billion, up 7.9% year- over-year. Its gross profit surged 4.5% from the previous year’s quarter to $529.07 million. Also, its non-GAAP net earnings and EPS were $43.94 million and $0.79, respectively.
Street expects UPBD’s revenue for the fiscal second quarter (ending June 2024) to increase 5.7% year-over-year to $1.04 billion. The company’s EPS for the current quarter is expected to amount to $1.02. In addition, UPBD topped the consensus EPS and revenue estimates in each of the trailing four quarters.
UPBD’s POWR Ratings reflect its solid prospects. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
UPBD has a B grade for Growth and Quality. Within the same industry, it is ranked #8.
To see UPBD’s additional ratings for Value, Momentum, Sentiment, and Stability, click here.
The Winner
The retail sector is experiencing significant growth due to shifts in consumer profiles, strong consumer spending, and rising disposable incomes. Moreover, rising demand for e-commerce has boosted the sector. Both GME and UPBD are poised to capitalize on the industry tailwinds.
Nevertheless, in a comparison with GME, UPBD emerges as a more favorable long-term investment due to its superior price and financial performance, heightened profitability, and discounted valuation metrics. Moreover, UPBD’s steady dividend policy further strengthens its case.
Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy. View all the top-rated stocks in the Specialty Retailers industry here.
What To Do Next?
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UPBD shares were unchanged in premarket trading Monday. Year-to-date, UPBD has declined -8.45%, versus a 7.90% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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