In this piece, I evaluated two noteworthy specialty retail stocks, GameStop Corp. (GME) and Aeon Co., Ltd. (AONNY), to determine which could be the superior investment for 2024. Before delving into the highlighted stocks, let's examine the economic landscape and its potential impact on the specialty retail sector.
In December, the Personal Consumption Expenditures (PCE) price index, the Fed's targeted inflation measure, rose by 2.6% annually, marking a milder increase compared to the 5.4% gain the previous year, as per Commerce Department data. However, it still falls 0.6 percentage points short of the central bank's 2% target.
The last 2023 inflation snapshot offers encouraging signs to Americans and the Federal Reserve. The Federal Reserve's preferred price gauge remained stable at a 2.6% annual rate and descended to its lowest level since March 2021.
Additionally, in December, personal income increased by $60.0 billion, marking a 0.3% month-on-month rise, as per estimates by the Bureau of Economic Analysis. Disposable Personal Income (DPI), excluding taxes, increased by $51.8 billion or 0.3%, while PCE rose by $133.9 billion or 0.7%.
Conclusively, American households concluded 2023 robustly. Incomes and wages substantially increased from the previous year, and consumers, undeterred by recession concerns, persistently engaged in robust spending, contributing to the ongoing economic growth.
Fueled by increasing confidence over the outlook for inflation and household incomes, fostering positive economic expectations for the year, U.S. consumer sentiment in January reached its highest level in two and a half years. In January, the University of Michigan's initial reading on the overall consumer sentiment index soared to 78.8, the highest level since July 2021, in stark contrast to December's 69.7.
Economists surveyed by Reuters had anticipated a preliminary reading of 70.0. "The economy is not going backwards, it is going forwards at the start of 2024," stated Christopher Rupkey, chief economist at FWDBONDS in New York. "For the first time, massive interest rate hikes have not put a damper on economic growth."
Elevated consumer spending breathes vitality into the specialty retail sector, propelling increased sales and revenue. Anticipated as a catalyst for business growth, the surge in demand is poised to elevate profitability, enabling specialty retailers to broaden their offerings, innovate, and fortify their market presence.
That said, the global specialty retailers market is expected to reach $42.70 billion by 2031, growing at a CAGR of 4%.
In terms of price performance, GME has plunged 17.7% over the past month, while AONNY gained 4.8% during the same period. Moreover, GME witnessed a 10.8% gain over the past three months, while AONNY jumped 11.6% over the same duration.
Additionally, GME declined 33.9% over the past year, closing the last trading session at $14.42, whereas AONNY climbed 16.8% during the same period, closing the last trading session at $23.80.
But which Specialty Retailers stock could be a better pick? Let's find out.
Recent Financial Results
For the third quarter that ended October 28, 2023, GME’s net sales decreased 9.1% year-over-year to $1.08 billion. Its gross profit declined 3.4% from the year-ago value to $281.80 million.
In addition, the company’s cash inflow from operating activities reduced by 89.2% from the prior year’s period to $19.10 million. Furthermore, GME’s free cash flow decreased 93.2% year-over-year to $11.10 million.
For the nine months that ended November 30, 2023, AONNY’s operating revenue increased 4.5% year-over-year to ¥7.03 trillion ($47.92 billion). Its operating profit rose 26.8% from the year-ago value to ¥142.82 billion ($974.05 million).
Also, profit before income taxes rose 8.5% from the prior year’s period to ¥117.35 billion ($800.35 million). Furthermore, AONNY’s profit during the quarter amounted to ¥58.19 billion ($396.82 million), up 27.9% from the previous year’s period.
Past and Expected Financial Performance
Over the past five years, GME’s revenue decreased at a CAGR of 6.7%. Additionally, its total assets declined at a 7.5% CAGR during the same time period.
The consensus revenue estimate of $5.50 billion for the fiscal year that ended January 2024 reflects a 7.3% year-over-year decrease. Similarly, the company is expected to report a revenue of $5.25 billion for the ongoing fiscal year ending January 2025, reflecting a 4.5% decline from the previous year.
AONNY’s revenue rose at a CAGR of 2% over the past five years. Also, its total assets increased at a CAGR of 5.3%. Moreover, its net income and EPS grew at a CAGR of 8% and 8.1%, respectively, over the same time frame.
For the fiscal year ending February 2024, analysts expect the company’s revenue to reach $64.30 billion, indicating a significant year-over-year increase. Likewise, the AONNY’s revenue for the next fiscal year ending February 2025 is expected to grow 3.6% from the previous year to $66.58 billion.
Valuation
In terms of trailing-12-month Price/Sales, AONNY is trading at 0.32x, 57.9% lower than GME, which is trading at 0.76x. Additionally, AONNY’s trailing-12-month EV/Sales of 0.62x is 6.1% lower than the 0.66x industry average. Moreover, AONNY’s trailing-12-month Price to Book ratio of 2.92x compares with GME’s 3.44x.
Thus, AONNY is more affordable.
Profitability
AONNY’s trailing-12-month revenue is 11.1 times that of what GME generates. Moreover, AONNY is more profitable, with a trailing-12-month gross profit margin of 37.03% compared to GME’s 24.10%.
In addition, AONNY’s trailing-12-month EBITDA margin and trailing-12-month net income margin of 6.26% and 0.46% compare with GME’s negative 0.22% and negative 0.14%, respectively.
POWR Ratings
GME has an overall rating of D, which equates to Sell in our proprietary POWR Ratings system. Conversely, AONNY has an overall rating of B, translating to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. GME has a D grade for Stability, reflected in its 24-month beta of 1.87. In contrast, AONNY has a B grade for Stability, supported by its 24-month beta of 0.10.
Moreover, GME has a C grade for Quality, which is justified by its moderate profitability metrics. The stock’s trailing-12-month cash per share of $2.98 is 27.1% higher than the industry average of $2.34. However, its trailing-12-month CAPEX/Sales of 0.68% is 77.9% lower than the industry average of 3.07%.
Conversely, AONNY has a B grade for Quality, aligning with its profitability surpassing industry standards. The stock’s trailing-12-month cash per share and trailing-12-month CAPEX/Sales of $7.27 and 4.36% are 318.7% and 35.3% higher than the industry averages of $1.74x and 3.22%, respectively.
Of the 41 stocks in the Specialty Retailers industry, GME is ranked #34, while AONNY is ranked #3.
Beyond what we've stated above, we have also rated both stocks for Growth, Value, Momentum, and Sentiment. Click here to view GME’s ratings. Get all AONNY ratings here.
The Winner
Flourishing economic resilience, eased inflation concerns, and robust consumer spending, the specialty retail sector foresees additional backing from improved consumer attitudes. In this scenario, AONNY seems a better bet than GME owing to its superior financial performance, heightened profitability, and greater stability.
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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AONNY shares were trading at $23.87 per share on Friday morning, up $0.07 (+0.29%). Year-to-date, AONNY has gained 5.13%, versus a 3.22% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
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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