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There is always more to a company's story than their bottom line. Although the bottom line, or net income, is the headline number that analysts watch and journalists report, companies can earn these profits in different ways - some more preferred than others. This is why it is always a good idea to study the sources of profits for a company.

One way to analyze sources of profitability is with DuPont analysis of return on equity (ROE) profitability.

ROE can be broken up into three components such that increases in ROE can be attributed to those components.

ROE

  • = (Net Profit/Equity)
  • = (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
  • = (Net Profit margin)*(Asset turnover)*(Leverage ratio)

Analyzing the sources of returns for a company, we can focus on companies with the following characteristics: Increasing ROE along with,

  • Decreasing leverage, i.e. decreasing Asset/Equity ratio
  • Improving asset use efficiency (i.e. increasing Sales/Assets ratio) and improving net profit margin (i.e. increasing Net Income/Sales ratio)

Companies passing all requirements are thus experiencing increasing profits due to operations and not to increased use of leverage.

To illustrate this analysis, we ran DuPont on about 120 of the largest U.S.-traded retail stocks.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the top six stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.?

We also created a price-weighted index of the stocks mentioned below, and monitored the performance of the list relative to the S&P 500 index over the last month. To access a complete analysis of this list's recent performance, click here.

Do you think these companies have strong profitability trends? Use this list as a starting-off point for your own analysis.

List sorted by change in ROE.

1. Abercrombie & Fitch Co. (ANF): Operates as a specialty retailer of casual apparel for men, women, and kids. Market cap of $6.28B. MRQ Net Profit Margin increased to 3.49% from 2.61% year-over-year, Sales/Assets increased to 0.31 from 0.26, while Assets/Equity decreased to 1.55 from 1.57. Exhibiting strong upside momentum - currently trading 11.49% above its SMA20, 16.15% above its SMA50, and 16.97% above its SMA200. The stock has had a couple of great days, gaining 5.14% over the last week.

2. Iconix Brand Group, Inc. (ICON): Operates as a brand management company that engages in licensing, marketing, and providing trend direction for a portfolio of owned consumer brands. Market cap of $1.35B. MRQ Net Profit Margin increased to 46.52% from 32.29% year-over-year, Sales/Assets increased to 0.0418 from 0.0404, while Assets/Equity decreased to 1.87 from 1.93. Might be undervalued at current levels, with a PEG ratio at 0.62, and P/FCF ratio at 6.99. The stock is a short squeeze candidate, with a short float at 13.31% (equivalent to 11.3 days of average volume). The stock has had a couple of great days, gaining 12.02% over the last week.

3. Tractor Supply Company (TSCO): Operates retail farm and ranch stores in the United States. Market cap of $5.17B. MRQ Net Profit Margin increased to 4.37% from 3.60% year-over-year, Sales/Assets increased to 0.63 from 0.56, while Assets/Equity decreased to 1.65 from 1.67. Exhibiting strong upside momentum - currently trading 9.39% above its SMA20, 13.98% above its SMA50, and 22.02% above its SMA200. The stock has had a couple of great days, gaining 9.25% over the last week.

4. Macy's, Inc. (M): Operates department stores and Internet Web sites in the United States. Market cap of $13.05B. MRQ Net Profit Margin increased to 4.06% from 2.65% year-over-year, Sales/Assets increased to 0.29 from 0.27, while Assets/Equity decreased to 3.44 from 4.22. Exhibiting strong upside momentum - currently trading 11.66% above its SMA20, 18.35% above its SMA50, and 21.83% above its SMA200. The stock has had a good month, gaining 12.44%.

5. Staples, Inc. (SPLS): Operates as an office products company. Market cap of $10.39B. MRQ Net Profit Margin increased to 3.03% from 2.34% year-over-year, Sales/Assets increased to 0.43 from 0.42, while Assets/Equity decreased to 1.92 from 2.05. Might be undervalued at current levels, with a PEG ratio at 0.83, and P/FCF ratio at 12.81. The stock has lost 26.5% over the last year.

6. Quiksilver Inc. (ZQK): Designs, produces, and distributes branded apparel, footwear, accessories, and related products. Market cap of $530.16M. MRQ Net Profit Margin increased to 2.07% from 1.88% year-over-year, Sales/Assets increased to 0.29 from 0.26, while Assets/Equity decreased to 3.21 from 3.52. This is a risky stock that is significantly more volatile than the overall market (beta = 2.54). The stock has lost 25.35% over the last year.

7. Nordstrom Inc. (JWN): A fashion specialty retailer that offers apparel, shoes, cosmetics, and accessories for women, men, and children in the United States. Market cap of $10.73B. MRQ Net Profit Margin increased to 6.23% from 5.81% year-over-year, Sales/Assets increased to 0.36 from 0.34, while Assets/Equity decreased to 3.86 from 4.03. Exhibiting strong upside momentum - currently trading 5.77% above its SMA20, 13.13% above its SMA50, and 15.6% above its SMA200. The stock has gained 34.52% over the last year.

8. Dollar Tree, Inc. (DLTR): Operates discount variety stores in the United States and Canada. Market cap of $9.73B. MRQ Net Profit Margin increased to 6.15% from 5.66% year-over-year, Sales/Assets increased to 0.62 from 0.61, while Assets/Equity decreased to 1.56 from 1.63. The stock has gained 55.82% over the last year.

9. Jos. A Bank Clothiers Inc. (JOSB): Design, retails, and direct-markets men's tailored and casual clothing and accessories. Market cap of $1.46B. MRQ Net Profit Margin increased to 8.91% from 8.75% year-over-year, Sales/Assets increased to 0.3240 from 0.3212, while Assets/Equity decreased to 1.36 from 1.38. The stock is a short squeeze candidate, with a short float at 16.84% (equivalent to 12.54 days of average volume). The stock has gained 17.44% over the last year.

10. Ross Stores Inc. (ROST): Operates off-price retail apparel and home accessories stores under the Ross Dress for Less and dd's DISCOUNTS brand names in the United States. Market cap of $9.94B. MRQ Net Profit Margin increased to 7.10% from 6.76% year-over-year, Sales/Assets increased to 0.68 from 0.67, while Assets/Equity decreased to 2.14 from 2.27. The stock has gained 48.37% over the last year.

*Accounting data sourced from Google Finance, all other data sourced from Finviz.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 10 Retail Stocks With Strong Sources Of Profitability