Related topics: retail, small caps, automotive, investments, stock market
Consumer spending rose 3.5% last year, the biggest increase since the recent recession began in late 2007. What's more, the spending gains quickened in the last quarter of 2010 -- up 4.4%, the highest quarterly growth since early 2006 -- suggesting that momentum will continue into this year.
That's good news for retail investors, who already have been doing relatively well. Despite a housing crisis and high unemployment, the Dow Jones U.S. Retail Total Stock Market Index returned 36.3% over the past decade, versus 6.2% for the Dow Jones U.S. Total Stock Market Index.
Retail chains have long been a favorite hunting ground for investors seeking to get in early on a fast-growing company. That's because there are plenty of companies to choose from, the business models are easy to understand and retailers start small and sometimes expand massively.
For example, Starbucks (SBUX, news) started in 1971 as a one-shop coffee roaster in Seattle and had fewer than 200 stores when it went public in 1992. Today it has more than 17,000 outlets in 50 countries, including about 11,000 stores in the United States. An investor who couldn't secure initial-offering shares at the subscription price of $17 but bought 100 shares at $21 on the first day of trading would now have 3,200 shares worth more than $32 apiece. That's a $102,400 return on an investment of $2,100.
Of course, for every Starbucks there's more than one Saxbys Coffee Worldwide. The privately held chain headquartered in Philadelphia opened its first store in 2004 and now has 30 outlets -- but the owners filed for bankruptcy protection in 2009. So choose carefully.
Here are three retail stocks with modest but fast-growing sales:
Buffalo Wild Wings
Headquarters: Minneapolis
Sales over the four most recent quarters: $594 million
Sales growth over the four most recent quarters: 15%
Shares of Buffalo Wild Wings (BWLD, news) have nearly tripled in price since July 2004. The store count has nearly tripled, too, to 734 locations in 44 states. The outlets have a sports bar theme that's popular with men in their 20s and 30s.
Prices that are about 11% lower than those of top competitors Applebee's and Chili's have allowed the company to gain market share, analyst Stephen Andersen at investment bank Miller Tabak said. Andersen raised his recommendation on the stock to "buy" from "hold" in mid-December.
The chain has relatively few stores in the Northeast or California, and thus can expand without drawing customers from existing stores, said Andersen, who thinks the store count could double again by 2018.
The stock has a price-to-earnings ratio of 23.2.
America's Car-Mart
Headquarters: Bentonville, Ark.
Sales over the four most recent quarters: $356 million
Sales growth over the four most recent quarters: 12%
By stock market value, auto dealer America's Car-Mart (CRMT, news) is only 6% of the size of AutoNation (AN, news) and 4% as large as CarMax (KMX, news). In a business where scale typically brings larger profit margins, the tiny retail chain turns about 13 cents of each sales dollar into operating profit, more than twice as much as the two industry giants.
That's because America's Car-Mart serves a lucrative niche: rural shoppers with bad credit or no credit who are in the market for a used vehicle but can't qualify for traditional financing.
The company offers its clientele low monthly payments but pricey terms. Then it takes on credit losses -- 22% of sales of late -- that would shock a typical lender. But its hard to fault its business model. The company recently gained market share while independent competitors struggled to find good inventory.
Profits recently fell short of Wall Street's forecasts due to high expenses owed partly to expansion. The stock has a price-to-earnings ratio of 10.6.
Zumiez
Headquarters: Everett, Wash.
Sales over the four most recent quarters: $455 million
Sales growth over the four most recent quarters: 14%
Zumiez (ZUMZ, news) sells clothing, shoes and gear for skateboarders and snowboarders, as well as those who just like the look. Sales at the company's longstanding stores rose more than 9% in December, and analysts forecast 7% growth in January.
That's faster growth than most clothing chains are seeing, and Zumiez should cash in because it "did not chase promotional mall activity," ThinkEquity analyst Christian Buss wrote in a Jan. 31 note.
Sales for the company could reach $800 million a year in four to five years, but at more than 25 times earnings, shares aren't cheap, says Buss, who has a "hold" recommendation on the stock.
