We’ve seen a better start to the year for the major market averages, with the S&P 500 (SPY) up over 3% year-to-date and the Nasdaq Composite enjoying an even more impressive 4.5% return.
While some of these gains could be whittled away if we see a disappointing CPI report with higher-than-expected inflation, this is certainly a welcome departure from last year’s mess, with both indexes down over 20% for the first time since 2008.
Unfortunately, not all stocks have participated, and one sector that continues to remain in the doghouse from a sentiment standpoint is the Retail Sector.
Within the sector, the restaurant group has outperformed on hopes of peak inflation and improving demand (lower gas prices), but other retail brands like Chico’s FAS (CHS), with the stock being one of the worst performers year-to-date.
While this is partially attributed to the company’s softer holiday sales numbers, the sell-off is starting to look overdone, and a lot looks priced in here, with the stock trading at a mid-single-digit PE ratio.
Meanwhile, within the restaurant space, Wingstop (WING) may be an outperformer but it is positioned to continue its outperformance with aggressive unit growth and deflation in its core commodity (bone-in chicken wings).
This allowed it to price less aggressively than peers and capture market share despite a challenging backdrop where traffic growth has been elusive, especially while gas prices are hovering above $4.00/gallon.
Let’s take a closer look at both names below:
Wingstop (WING) began as a small buffalo-style chicken wing restaurant in Texas and has since grown to 1,800+ restaurants, with more than 95% of its system being franchised.
Since going public, the company has outperformed nearly all other restaurant stocks with a 640% return in just seven years.
This move is largely justified by the stock posting a ~20% compound annual EPS growth rate and consistently growing its restaurant base at a double-digit pace.
However, the company is still growing and innovating, releasing a new chicken sandwich this year, maintaining an industry-leading digital sales mix (62%), and entering new markets.
In the company’s most recent quarterly report, Wingstop posted sales of $92.7 million (+41% year-over-year), and quarterly earnings per share [EPS] of $0.45, tying its previous record.
The strong sales performance has positioned Wingstoop to report annual EPS of $1.67 this year, a 23% increase during a year when many companies have struggled just to maintain earnings.
This divergence is related to benefiting from bone-in-wing deflation, which lifted margins in the period and gave the company the flexibility to price below the industry average.
The ability to price conservatively and still maintain strong margins is a huge benefit, given that most brands have no choice but to raise prices, which has impacted demand.
Understandably, many investors might see the stock as fully valued at ~75x FY2023 earnings estimates ($2.00).
However, WING has consistently grown annual EPS at 20% per year; its execution has been near flawless, and in a recessionary environment, I would expect the rare growth stories out there to command a premium multiple.
That said, although I believe that Wingstop could hit new all-time highs above $185.00 per share this year and I continue to like the long-term growth story (4,000+ restaurants globally), I believe the ideal area to buy the stock is closer to its 200-day moving average ($130.00), so I will be watching this area to start a new position.
Chico’s FAS (CHS)
Chico’s FAS (CHS) is a $580 million company in the Retail-Apparel industry group with a portfolio of three brands: Chico’s, White House Black Market [WHBM], and Soma, with the latter being its intimate segment.
The stock has seen a significant fall from grace over the past several years, with its share price falling 80% from a high of $17.00 in 2012.
However, things appear to be finally turning around. This turnaround has been helped by a complete revamp of the management team, focusing on growing its digital sales (up ~1000 basis points vs. 2020 levels), and right-sizing its store fleet, closing under-performing stores with 18 permanent net closures on a year-over-year basis as of Q3 2022.
Unfortunately, while key operating metrics and its financial results are trending in the right direction (2021 marked its best gross margins since 2017), the stock has come under pressure due to worries about consumer spending in more discretionary categories.
This was exacerbated by the company’s Q4 sales coming in a little softer than expected, with the most recent update suggesting sales would come in at $510 million at the mid-point vs. a previous outlook of $454 million.
The result is that the stock is one of the worst performers year-to-date in the Retail Sector (XRT), and FY2022 annual EPS estimates of $0.88 look too ambitious.
That said, while FY2022 annual EPS estimates could come in lower than expected, Chico’s FAS is still on track to see a 100% increase in annual EPS year-over-year ($0.84 vs. $0.40), and based on these earnings, the company is trading at just ~5.5x FY2022 earnings estimates.
This is a dirt-cheap valuation for a company that expects to grow annual EPS again next year, with its Soma segment continuing to thrive and ongoing work to increase market share in its other two brands.
So, while holiday sales were a little lighter than hoped, I see Chico’s FAS as a Buy below $4.45, with it sitting at just ~4.8x FY2023 earnings estimates ($0.93).
While several of the best deals are gone, with many sectors beginning to rebound after a rough 2022, Chico’s FAS is one example of a turnaround story at a very attractive price, and Wingstop is an example of a growth story that should continue to thrive given its exceptional execution.
That said, I prefer to buy on pullbacks when the S&P 500 is trading in a cyclical bear market, so I see the ideal buy points for both stocks being $4.45 and $130.00, respectively.
Disclaimer: This article is the opinion of the contributor themselves. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information in this writing.