Given changing consumer demographics, urbanization, improving infrastructure and the appeal of international brands, we evaluate the prospects of specialty retail stocks GameStop (GME) and Betterware (BWMX) to determine the better investment. Read on to find out.
Robust consumer spending, changing consumer demographics, urbanization, credit availability, infrastructure improvements and the presence of international brands are overall improving specialty retail’s prospects. It could therefore make sense to invest in specialist retail.
A Basic Comparison of GameStop Corp. (GME) and Betterware de México, SAPI de CV (BWMX) shows the better upside potential of BWMX. Before I present what strengthens the investment case for BWMX, let’s see what shapes the specialty retail outlook.
In the third quarter, the economy is poised to achieve its strongest growth in almost two years, defying recession forecasts. Robust consumer spending was boosted by higher wages as a result of a tight labor market. Bloomberg Economics estimates that economic activity likely grew at an annual rate of nearly 5% over the past three months.
Most economists have revised their outlook and now expect the Federal Reserve to provide a “soft landing” for the economy. This is underpinned by expectations of continued strong labor productivity and a controlled decline in unit labor costs over the July-September period.
The main catalyst appears to be consumer spending, which accounts for over two-thirds of US economic activity. Americans buy durable items like automobiles and attend concerts. Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, said: “We are experiencing the exact opposite (of a recession).”
He added: “The American consumer, the biggest driver of the US economy, appears to have experienced a mid-year rebound, particularly as confidence improved over the summer due to the stock market rally and more stable gasoline prices.”
Additionally, changing consumer demographics, urbanization, accessible credit, infrastructure improvements and the proliferation of international brands are driving the specialty retail market. The global specialty retail market is expected to reach $42.70 billion by 2031, growing at a CAGR of 4%.
In terms of price performance, shares of Texas-based gaming and entertainment products provider GME have fallen 22.4% over the past month, while Mexico-based direct-to-consumer company BWMX has gained 3.9%. Additionally, over the past three months, GME has seen a 40% decline, while BWMX has gained 32.9%.
Additionally, GME has plunged 49% over the past year, closing the most recent trading session at $13.71, while BWMX has gained 108.5% over the same period, closing the most recent trading session at $17.14.
Here are the reasons why I think BWMX is a better investment now:
Current financial results
In the second fiscal quarter ended July 29, 2023, GME net sales increased 2.4% year-over-year to $1.16 billion. However, its adjusted operating loss was $20.70 million. Additionally, the company’s adjusted net loss and loss per share were $9 million and $0.03, respectively.
Additionally, the Company’s cash and cash equivalents stood at $894.70 million as of July 29, 2023, compared to $908.90 million as of July 30, 2022.
For the second quarter ended June 30, 2023, BWMX’s gross profit increased 4.5% year-on-year to Ps. 2.36 billion ($128.91 million). Operating income increased 13.9% year-on-year to Ps. 624.87 million (US$34.14 million). Additionally, EBITDA increased 16.6% to P717.43 million (US$39.20 million) compared to the same quarter last year.
Additionally, the Company’s cash and cash equivalents stood at Ps. 728.87 million (US$39.82 million) as of June 30, 2023, compared to Ps. 575.73 million (US$31.46 million) as of June 30, 2023 June 30, 2022.
Past and expected financial performance
Over the past three years, GME sales grew at a CAGR of 1.3%. During the same period, the company’s total assets grew at a CAGR of 5.7%. However, leveraged free cash flow declined at a compound annual growth rate of 2.9%.
Analysts expect GME sales to decline 2.5% year-over-year to $5.78 billion through January 2024. Additionally, the company’s loss per share for the current year is estimated at $0.02.
Over the past three years, BWMX’s revenue grew at a compound annual growth rate of 48.5%. During the same period, the company’s total assets and leveraged free cash flow increased at compound annual growth rates of 59.5% and 38.6%, respectively.
For the fiscal year ending December 2023, BWMX’s revenue is expected to increase 17.7% year-over-year to $737.19 million. The company’s earnings per share for the current year are expected to be $1.42, up 28% year over year.
Evaluation
In terms of trailing 12-month price-to-sales ratio, GME is trading at 0.72x, 15.3% lower than BWMX which is trading at 0.85x. Additionally, GME’s trailing 12-month EV/Sales of 0.62x is 50% lower than BWMX’s 1.24x. However, GME’s trailing 12-month price/cash flow of 13.77x compares to BWMX’s 3.9x.
profitability
GME’s trailing 12-month revenue is 7.7x what BWMX generates. However, BWMX is more profitable with a gross profit margin of 71.39% in the last 12 months compared to 23.82% for GME.
Additionally, BWMX’s EBITDA margin and net profit margin over the last 12 months are 18.85% and 5.81%, respectively, compared to GME’s EBITDA margin and net profit margin of negative 1.65% and 1.72%, respectively .
POWR Reviews
GME has an overall rating of D, which equates to a Sell in our proprietary POWR rating system. In contrast, BWMX has an overall rating of A, which translates to a Strong Buy. POWR Ratings are calculated taking 118 different factors into account, with each factor given optimal weight.
Our proprietary scoring system also rates each stock across eight different categories. GME receives a grade of C for Quality, reflecting its mixed profitability. The company’s trailing 12-month gross profit margin of 28.82% is 33.4% lower than the industry average of 35.74%, while its leveraged FCF margin of 6.57% is 28.4% trailing-12-month is above the industry average of 5.12%.
In contrast, BWMX has an “A” grade for quality, which corresponds to its above-average profitability. Trailing 12-month gross profit margin and leveraged FCF margin of 71.39% and 16.84%, respectively, are 99.7% and 229.1% higher than the respective industry averages of 35.74% and 5.12%, respectively .
Additionally, GME receives a grade of “C” for sentiment, reflecting the expected decline in earnings for the current fiscal year. On the other hand, BWMX has an “A” rating for sentiment, which is in line with positive analyst estimates.
Of the 43 specialty retail stocks, GMW ranks 39th, while BWMX ranks first.
Beyond the above, we also evaluated both stocks for growth, value, momentum and stability. Click here to view GME ratings. Get all BWMX reviews here.
The winner
Given favorable industry trends, specialty retailers GME and BWMX are strategically positioned for growth. However, BWMX’s superior financial performance, higher profitability, and stronger growth track record make it the preferred investment over GME.
Our research shows that the chances of success increase when you invest in stocks with an overall Strong Buy rating. Check out all the top-rated stocks in the specialty retail industry here.
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GME shares fell $0.04 (-0.29%) in pre-market trading on Thursday. Year-to-date, GME is down -25.73%, while the benchmark S&P 500 index is up 10.40% over the same period.
About the Author: Aanchal Sugandh
Aanchal’s passion for financial markets drives her work as an investment analyst and journalist. She has her bachelor’s degree in finance and is completing the CFA program. With her fundamental analysis skills, she is able to assess the long-term prospects of stocks. Their goal is to help investors build portfolios with sustainable returns.
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