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Could these retail stocks benefit from higher consumer confidence?

By: Kapitall
Posted: 6/25/2014 10:35:00 AM
Referenced Stocks:

By James Dennin for Kapitall.

The Consumer Confidence report came out on Tuesday and the news was a lot better than previously expected : climbing 3 points from 82.2 to 85.2, the highest level since 2008. 

While other measures of consumer sentiment have been mixed, all the numbers are closely scrutinized as consumer spending accounts for about 70% of the US economy.

Also bolstering stocks this week was a strong number for housing sales, which rose faster in May than they have in 22 years. A lot of investors will be watching tomorrow's GDP report before making too many changes to their portfolio.

But the numbers are still encouraging, so we decided to look into retail and consumer goods stocks in case any will get a bump from the news. 

We decided to screen for consumer goods and retail stocks that have rising profits. To do that we used the DuPont breakdown of return on equity (ROE) . ROE Is a good measure of profitability, however it can be manipulated by changes in leverage: as the company takes on more debt, shareholders' equity will decrease, thus boosting ROE.

The DuPont breakdown gives a much more detailed picture of where the ROE is coming from. In the best case it comes from higher sales of more expensive goods. 

ROE = (net profit margin) * (asset turnover) * (equity multiplier)

  1. Operating efficiency: net profit margin = net income / revenues
  2. Asset use efficiency: asset turnover = revenue / total assets
  3. Leverage: equity multiplier = assets / stockholders equity

Using this model, if a company's ROE rises due to an increase in net profit margin or asset turnover, it is a signal that the business is doing well and expanding for the right reasons. However if leverage is the key factor, then the company may not be doing as well as it appears. 

Click on the interactive chart to view data over time. 

1. PriceSmart Inc. ( PSMT , Earnings , Analysts , Financials ): Operates warehouse clubs in the United States, Latin America, and the Caribbean. Market cap at $2.61B, most recent closing price at $86.35.  

MRQ net profit margin at 4.19% vs. 4.1% y/y.

MRQ sales/assets at 0.808 vs. 0.766 y/y.

MRQ assets/equity at 1.674 vs. 1.789 y/y.  

2. Monro Muffler Brake Inc. ( MNRO , Earnings , Analysts , Financials ): Provides automotive undercar repair and tire services in the United States. Market cap at $1.74B, most recent closing price at $55.27.  

MRQ net profit margin at 5.86% vs. 4.15% y/y.

MRQ sales/assets at 0.267 vs. 0.265 y/y.

MRQ assets/equity at 1.827 vs. 2.026 y/y.  

3. PetSmart, Inc. ( PETM , Earnings , Analysts , Financials ): Operates as a specialty retailer of products, services, and solutions for pets in North America. Market cap at $5.65B, most recent closing price at $56.96.  

MRQ net profit margin at 6.% vs. 5.99% y/y.

MRQ sales/assets at 0.692 vs. 0.691 y/y.

MRQ assets/equity at 2.331 vs. 2.354 y/y.  

4. Tiffany & Co. ( TIF , Earnings , Analysts , Financials ): Engages in the design, manufacture, and retail of fine jewelry worldwide. Market cap at $12.86B, most recent closing price at $99.65.  

MRQ net profit margin at 12.41% vs. 9.33% y/y.

MRQ sales/assets at 0.21 vs. 0.192 y/y.

MRQ assets/equity at 1.696 vs. 1.76 y/y.  

(List compiled by James Dennin. Monthly returns sourced from Zacks Investment Research, Dupont Breakdown sourced from Google Finance. All other data sourced from Finviz.)

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