- Market value: $37.6 billion
- Dividend yield: N/A
- Analysts' ratings: 15 Strong Buy, 6 Buy, 8 Hold, 2 Sell, 1 Strong Sell
- Analysts' consensus recommendation: 2.00 (Buy)
Lululemon Athletica (LULU, $293.23) dominates the athleisure market. But economic jitters and concerns that the company's sales and earnings growth is slowing have investors reluctant to jump on one of the best consumer discretionary stocks there is.
Wedbush analyst Tom Nikic (Outperform, the equivalent of Buy) commented on LULU in his Jan. 27 report to clients. He labeled the Vancouver-based company as "the controversial play" in the footwear and apparel market.
"Investor sentiment has rapidly soured on this once-beloved stock, following a Q3 gross margin miss and a cut to Q4 gross margin guidance earlier this month. Earlier this week, a competitor downgraded the stock to Underperform, highlighting the deteriorating Street sentiment," Nikic wrote.
However, he suggests that the unusually high negative sentiment surrounding LULU has made it a value stock of sorts, something you wouldn't have expected a year or two ago.
"As weird as this is to say, LULU shares actually look 'cheap.' The stock now trades at just a mid-teens EV/EBITDA multiple, which is well below NKE (27x) and represents LULU's cheapest valuation multiple since 2018," the analyst said.
Recently, Men'sHealth revealed that Super Bowl MVP Patrick Mahomes, who won his second NFL Championship on February 12, wears a "lucky" pair of red Lululemon underwear for every football game he plays in. Some analysts have neglected to consider how popular its products are with celebrities and average consumers.
In early January, the company raised its revenue guidance for Q4 2022 by $55 million at the low end to $2.66 billion and $45 million at the high end to $2.7 billion. So, despite cutting its gross margin guidance by 100 basis points in the fourth quarter, it still expects to earn at least $4.22 a share. The consensus for all of 2022 is $9.95 a share, an 8% increase over 2021. Compared to most of its competitors, it is still moving in a positive direction on the earnings front.
While LULU stock is flat on a year-over-year basis, it has historically gone on nice runs after being stuck in neutral for an extended period. Negative sentiment aside, Lululemon remains one of the best long-term consumer discretionary stocks.
- Market value: $25.5 billion
- Dividend yield: 1.8%
- Analysts' ratings: 15 Strong Buy, 6 Buy, 13 Hold, 0 Sell, 0 Strong Sell
- Analysts' consensus recommendation: 1.94 (Buy)
Tractor Supply (TSCO, $231.41) is the largest rural lifestyle retailer in the U.S., with 2,027 stores operating in 49 states. In October 2022, TSCO acquired 81 stores under the Orscheln Farm and Home banner for $391 million. It will rebrand all of them by the end of 2023. As part of the deal, it sold the 85 remaining Orscheln stores to two other buyers for $69 million.
Analysts continue to be enthusiastic about the specialty retailer's stock. On February 11, research firm Gordon Haskett upgraded TSCO to Buy from Accumulate. At the same time, it raised its target price by $20 to $255, above where it's currently trading.
Meanwhile, Credit Suisse analysts (Outperform) met with Tractor Supply management in late January and toured some of its Nashville-area stores. They are impressed with its current business.
"We came away from these events even more convinced that TSCO's share gains will prove to be sticky for the following reasons: 1) The shift to 'Life out Here' is not transitory, it is permanent, and therefore TSCO share gains are sustainable," the analysts stated in a research note.
Most importantly, Tractor Supply's growth runway remains intact. Credit Suisse estimates that TSCO has a market share of just 8% of the $180 billion total addressable market where it competes.
As the company said in its fourth-quarter earnings release, it expects to open 70 Tractor Supply stores and rebrand 81 Orscheln Farm and Home rebrands this year. That's expected to translate into revenue of at least $15 billion and net income of $1.13 billion.
- Market value: $9.6 billion
- Dividend yield: 2.9%
- Analysts' ratings: 11 Strong Buy, 5 Buy, 8 Hold, 0 Sell, 0 Strong Sell
- Analysts' consensus recommendation: 1.88 (Buy)
Tapestry (TPR, $40.55) is the retail holding company for luxury brands Coach, Kate Spade and Stuart Weitzman.
In mid-February, the company reported fiscal second-quarter earnings of $1.36 per share, beating expectations. Revenues were $2.03 billion, matching the Street's estimate.
According to Ian Schatzberg, co-founder of brand agency General Idea, Tapestry continues to remake itself to be more relevant with Gen Z and millennial shoppers.
"What you're seeing with the Tapestry numbers is an indication of a portfolio of brands that has really focused on modernizing the way in which they behave and connecting with consumers who may be under some degree of pressure but are still looking to buy handbags, apparel, outerwear and footwear," Schatzberg told CNBC.
The company recently explained what's made it successful in the five years since its creation as a holding company. Among the five points it listed was its transformation through its Acceleration Program that started in 2020. TPR pointed out that in the 2.5 years that the program has been around, digital sales have more than tripled to $2 billion, the company generated record 2022 revenue of $6.7 billion, and it attracted 15 million new customers from North America to its brands.
As a result of this success, Tapestry launched a new program to build on its momentum. Key financial targets include $8 billion in annual revenue by the end of fiscal 2025, an operating margin of 19%, and earnings per share over $5. Should TPR achieve these goals, it won't have a problem returning $3 billion through share repurchases and dividends over the next three years.
As a result of the company's better-than-expected performance in the second quarter, it raised its guidance for all of 2023, to revenue of $6.6 billion (2%-3% higher than in 2022), with earnings per share between $3.70 and $3.75.
If this fundamental strength isn't enough to convince investors that TPR is one of the best consumer discretionary stocks out there, shares are also reasonably priced right now. The mid-cap stock is trading at 9.5 times forward earnings, well below its five-year average of 11.6.
- Market value: $85.7 billion
- Dividend yield: 1.6%
- Analysts' ratings: 14 Strong Buy, 5 Buy, 6 Hold, 1 Sell, 0 Strong Sell
- Analysts' consensus recommendation: 1.77 (Buy)
Off-price retailer TJX (TJX, $74.16) delivered solid fourth-quarter results in late February. On the top line, it brought in $14.52 billion, 4.8% higher than the year earlier. For the entire fiscal year, revenue was $49.94 billion, 2.9% better than in 2022. On the bottom line, it earned 89 cents a share in the fourth quarter, 14.1% higher than a year ago, while full-year earnings increased 9.1% to $3.11 a share. Same-store sales growth was also impressive, rising 13%.
The company is optimistic about its current fiscal year too. TJX is guiding for same-store sales growth of 2.5% at the midpoint of its guidance, with earnings per share of $3.35, nearly 8% higher than in 2023.
"Fiscal 2024 is off to a strong start and we remain confident in improving our profitability this year and reaching our pretax profit margin target of 10.6% by Fiscal 2025," CEO Ernie Herrman said in TJX's fourth-quarter press release.
TJX stock has shown strength on the price chart, too, up 38% from its 52-week low of $53.69 that was hit last May. Some analysts are concerned that the retail-stock rally may come to an end after all the fourth-quarter results are in.
"[The rally] has pushed valuation mostly above pre-Covid levels across our space," says Morgan Stanley analyst Alex Straton. "We fear these outsized stock price and valuation moves could prove premature ahead of the 4Q reports, which may come with disappointing initial 2023 estimate guides."
However, Argus Research, which has a Buy rating and a target price of $92 on TJX stock, published a research report in early February that was very upbeat.
"The company's edge is that it offers a treasure hunt of unique, brand-name products at bargain prices. The company's 1,200+ buyers, lean cost structure, and ability to satisfy value-conscious shoppers should be a competitive advantage as gasoline and grocery inflation crimp discretionary income," analyst wrote in the research report. "When vendors and other retailers are overstocked, the merchants at TJX have the opportunity to scoop up great items that enhance the treasure hunt atmosphere that drives traffic and sales."
As a result of its value proposition, it has a history of delivering same-store sales growth even during recessions. That makes it one of the best consumer discretionary stocks to buy now.
- Market value: $5.7 billion
- Dividend yield: 2.0%
- Analysts' ratings: 7 Strong Buy, 5 Buy, 3 Hold, 0 Sell, 0 Strong Sell
- Analysts' consensus recommendation: 1.73 (Buy)
Recreational product maker Brunswick (BC, $80.15) is a top stock pick of Cantillon Capital Management. At the end of December 2022, the New York-based hedge fund held 4.21 million shares, representing 5.81% of Brunswick's outstanding shares.
Cantillon manages almost $20 billion in assets. Brunswick is Cantillon's 18th largest position out of its 40-stock portfolio. It is one of only two consumer discretionary stocks held by the hedge fund, with human resources solutions provider Trinet (TNET) being the other.
As for the company itself, it continues to sell lots of boats. Of course, it's possible that interest rates and inflation could slow sales, but for now, it's business as usual.
In the fourth quarter, BC delivered very healthy results, with net sales of $1.58 billion, 10.6% higher than a year earlier. It also saw a 29.4% jump in adjusted operating income to $202 million. For all of 2022, the company's revenues were 16.5% higher, to $6.81 billion, while its adjusted operating earnings were $1.05 billion, 18.3% more than in 2021.
Brunswick is cautiously optimistic about 2023. It expects revenues of $6.8 billion to $7.2 billion, with adjusted operating profits of approximately $1.05 billion at the midpoint of its revenue guidance.
Looking at a geographic breakdown of sales, the U.S. accounts for 70% of revenue, followed by Europe (13%), Canada (7%) and Asia-Pacific (7%). Between 2020 and 2022, its Canadian revenues have jumped 86%,faster than the U.S. growth rate.
Raymond James analyst Joseph Altobello has an Outperform rating and a $100 target price on BC stock. His research report from early February was very complimentary.
"Our Outperform rating on the shares of Brunswick Corp. reflects the company's strong positioning in the healthy global marine industry, with an assortment of leading brands across engines, boats, and P&A (Parts and Accessories)," Altobello stated. "Importantly, we expect BC to continue to gain significant market share in engines, while benefiting from a more modest boat pipeline refill opportunity as well as parts and accessories stabilization in 2023."
Brunswick is another cheap consumer discretionary stock. It's currently trading at 7.7 times forward earnings. That's considerably lower than its five-year average of 11.7.
- Market value: $43.9 billion
- Dividend yield: N/A
- Analysts' ratings: 21 Strong Buy, 4 Buy, 10 Hold, 0 Sell, 0 Strong Sell
- Analysts' consensus recommendation: 1.69 (Buy)
Chipotle Mexican Grill (CMG, $1,590.87) announced on February 15 that it was launching a new restaurant called Farmesa Fresh Eatery in Santa Monica, California. The concept will be a ghost kitchen (delivery and takeout only) in partnership with Kitchen United Mix, an operator of ghost kitchens across the U.S. Farmesa will offer bowls priced between $11.95 and $16.95.
"Our New Ventures team, which was created in 2022, developed a unique restaurant concept that uses classic culinary techniques with flavorful ingredients in a fast casual setting that we're excited to test and learn on before we determine a broader rollout strategy," CEO Brian Niccol said in Chipotle's press release.
Chipotle can test the concept without breaking the bank by setting up the restaurant in a ghost kitchen. It remains to be seen if it rolls out the concept beyond California, but it's a story worth following in 2023.
Argus Research published a report on Chipotle in early February reaffirming its Buy rating on the stock and raising its price target to $1,900, well above CMG's current share price. Argus analyst John Staszak feels the company will take business away from more expensive full-service restaurants.
"We think that Chipotle has a healthy balance sheet (approximately $384 million in cash and cash equivalents at the end of 4Q22) along with robust mobile ordering and delivery platforms," Staszak wrote in the note to clients.
The fundamental strength of one of Wall Street's best consumer discretionary stocks was seen in its most recent earnings report. For all of 2022, the burrito chain's revenues increased by 14% to $8.6 billion, with 8% same-store sales growth. The company also opened 236 restaurants last year. Earnings per share in 2022 were $32.78, 29% higher than a year earlier.
In 2023, CMG expects to open between 255 and 285 new locations, 10 to 15 of which are relocations to add Chipotlanes for drive-thru. As a result, same-store sales should be in the high-single-digits.
- Market value: $59.8 billion
- Dividend yield: N/A
- Analysts' ratings: 11 Strong Buy, 8 Buy, 3 Hold, 0 Sell, 0 Strong Sell
- Analysts' consensus recommendation: 1.64 (Buy)
MercadoLibre (MELI, $1,188.96) has bounced back nicely in 2023, up about 40% year-to-date. However, it remains well off its all-time high of $2,020 from January 2021.
While investors haven't stayed loyal to its stock over the past 24 months, there's no question that its business is doing well. Take its fourth-quarter numbers: Revenues increased by 56.5% year-over-year, excluding currency, to $3.0 billion, while its operating income was $349 million, 13.5 times higher than a year earlier.
For the full year, MercadoLibre's total revenue was up 49%, excluding currency, to $10.5 billion. However, the most important metric from 2022 was its operating profit. MELI earned $1.0 billion in 2022, 134% higher than a year earlier.
Even more impressive: MELI's operating margin has increased for four consecutive quarters, from 1.1% in Q4 2021 to 11.6% in Q4 2022.
Top-line growth was driven by gross merchandise volume (GMV) in its e-commerce business. For all of 2022, its GMV was $34.4 billion, 22% higher than the year earlier, and its payments business had a total payment volume (TPV) of $123.6 billion, up 60% over 2021. And MELI had 148 million unique active users at the end of December, 6.0% more than the year prior.
On a currency-neutral basis, MercadoLibre's revenue from its Argentina operations increased by 143%. Brazil and Mexico also experienced impressive growth, up 28% and 46%, respectively, with Brazil accounting for 51% of its overall revenue. Brazil remains by far the company's most important country in Latin America.
The company's fintech division is also impressive. At the end of 2022, MercadoLibre had a loan portfolio of $2.8 billion. Its loan portfolio growth was driven higher by consumer loans (55% of loans) and credit cards (22%).
MELI is trading at 5.8 times sales, one of the lowest multiples in the past decade and less than half its five-year average. It's time to be greedy when others are fearful, especially when it comes to the best consumer discretionary stocks out there.
- Market value: $10.7 billion
- Dividend yield: N/A
- Analysts' ratings: 11 Strong Buy, 2 Buy, 3 Hold, 0 Sell, 0 Strong Sell
- Analysts' consensus recommendation: 1.50 (Strong Buy)
Deckers Outdoor (DECK, $406.39) has a billion-dollar brand with its UGG boots. It sold $1.98 billion in fiscal 2022 (March year-end), 15.4% more than in 2021. However, in Q3 2023, its UGG brand had revenue of $930.4 billion, 1.6% lower than Q3 2022.
Thanks to the development of HOKA, the company's second-biggest brand, investors need not worry. In 2022, HOKA's revenue increased 56% to $891.6 million. Through the first nine months of fiscal 2023, HOKA's revenues were $1.02 billion, 67% higher than a year earlier. In Q4 2022, HOKA's net sales were $283.5 million. Based on a 60% increase in Q4 2023, the brand will generate nearly $1.5 billion annually.
"Our brands delivered another stellar quarter, led by record results for both HOKA as well as our consolidated direct-to-consumer business," said Dave Powers, president and CEO of Deckers Outdoor, in its Q3 2023 press release.
"We believe UGG and HOKA are two of the healthiest, well positioned brands in their respective markets, and with the strength of our operating model, Deckers is poised for continued success going forward," Powers added.
UGG and HOKA have become quite the tandem in just a few short years. Deckers acquired HOKA in 2013 when it had only $3 million in sales. Management initially thought it might be a $100-million brand. It's certainly achieved that and more.
Wedbush analysts Tom Nikic and Austin Borina have an Outperform rating on DECK stock with a $485 target price, providing investors with plenty of upside potential over the next 12 months.
"While quarter-to-quarter trends are being swung by timing shifts in the wholesale channel, ultimately, DECK has two of the hottest brands in our space right now (as evidenced by solid DTC growth at UGG and the exceptional growth at Hoka)," the analysts wrote in their February 3 research report. "When coupled with the margin opportunities at the company and the sterling balance sheet (over $1 billion in cash, or ~$40/share), we continue to view DECK as the strongest all-around fundamental name in our coverage."
As far as consumer discretionary stocks go, Deckers is one of the best from a growth perspective.
- Market value: $4.9 billion
- Dividend yield: N/A
- Analysts' ratings: 4 Strong Buy, 1 Buy, 1 Hold, 0 Sell, 0 Strong Sell
- Analysts' consensus recommendation: 1.50 (Strong Buy)
Bob Fox and his brother Geoff started selling their own motocross suspension designs in 1974. Fox rode motocross bikes in his spare time, away from his day job as a trained physicist. Fox Factory Holding (FOXF, $116.11) officially launched in 1978, and it's been growing ever since.
The company went public in August 2013, selling nearly 10 million shares to investors at $15. Its shares are up substantially in the nearly 10 years since, boasting a compound annual growth rate of roughly 24%.
Today, Fox Factory has moved well beyond motocross suspensions, providing shocks, suspension forks, and lots of other stuff for pretty much anything that moves and requires above-average durability and reliability.
And business is good. The company reported its Q4 2022 results on February 23. They were a thing of beauty, with top-line revenue growth of 19.4% to $408.6 million, while adjusted net income jumped 35.7% to $60.8 million.
As a result of its strong finish, revenues ($1.60 billion) and earnings ($232.67 million) for the year were both records. For 2023, FOXF's initial guidance calls for $1.69 billion in revenue at the midpoint and $5.30 a share in adjusted earnings, slightly down from $5.49 in 2022.
"As we enter 2023, we are aware that the global economy will continue to experience some challenges under the weight of inflationary pressures and tightening monetary conditions," CEO Mike Dennison stated in the company's Q4 earnings release. "Our achievements in 2022 provide us with confidence in our ability to execute our tactical objectives as well as deliver on our long term strategic vision."
Stifel is one of many analysts who believe Fox Factory is one of the best consumer discretionary stocks out there. They have a Buy rating and a target price of $133.
"We view Fox Factory as a strong brand and innovation leader in the growing market for premium vehicle suspensions," Stifel analysts say. "With visibility into 2023 improving and tailwinds to margin, we view the risk reward profile as attractive for a business with strong secular growth potential."
