Seeking Alpha
Value, growth, long-term horizon, medium-term horizon
Profile| Send Message| ()  

There is a lot more to profitability than whether a company's bottom line is increasing. Profits can come from several sources, with some better than others. To get a deeper look into a company's profit trends, we performed DuPont analysis on the retail industry.

DuPont analyzes return on equity (ROE, or net income/equity) profitability by breaking ROE up into three components:

ROE

= (Net Profit/Equity)

= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)

= (Net Profit margin)*(Asset turnover)*(Leverage ratio)

We therefore focus on companies with the following positive 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 with all of these characteristics are experiencing increasing profits due to operations and not to increased use of financial leverage.

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? Use this list as a starting point for your own analysis.

List sorted by increase in ROE.

1. The Men's Wearhouse, Inc. (MW): Operates as a specialty retailer of men's suits in the United States and Canada. Market cap of $1.66B. MRQ Net Profit Margin increased to 6.82% from 4.59% year-over-year, Sales/Assets increased to 0.40 from 0.39, while Assets/Equity decreased to 1.40 from 1.43. The stock is a short squeeze candidate, with a short float at 8.35% (equivalent to 5.78 days of average volume). The stock has had a good month, gaining 16.92%.

2. hhgregg, Inc. (HGG): Operates as a specialty retailer of consumer electronics, home appliances and related services. Market cap of $535.23M. MRQ Net Profit Margin increased to 0.97% from 0.82% year-over-year, Sales/Assets increased to 0.94 from 0.78, while Assets/Equity decreased to 2.27 from 2.28. The stock is a short squeeze candidate, with a short float at 26.15% (equivalent to 15.44 days of average volume). The stock has had a couple of great days, gaining 5.71% over the last week.

3. Tractor Supply Company (TSCO): Operates retail farm and ranch stores in the United States. Market cap of $4.98B. 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. The stock has gained 45.69% over the last year.

4. Vitamin Shoppe, Inc. (VSI): Operates as a specialty retailer and direct marketer of nutritional products. Market cap of $1.15B. MRQ Net Profit Margin increased to 5.70% from 3.87% year-over-year, Sales/Assets increased to 0.43 from 0.38, while Assets/Equity decreased to 1.41 from 1.75. The stock is a short squeeze candidate, with a short float at 11.12% (equivalent to 7.17 days of average volume). The stock has gained 18.55% over the last year.

5. Columbia Sportswear Company (COLM): Engages in the design, development, sourcing, marketing and distribution of outdoor apparel, footwear, accessories and equipment in the United States, Latin America, the Asia Pacific, Europe, the Middle East, Africa and Canada. Market cap of $1.57B. MRQ Net Profit Margin increased to 11.92% from 10.36% year-over-year, Sales/Assets increased to 0.42 from 0.38, while Assets/Equity decreased to 1.2881 from 1.2945. The stock is a short squeeze candidate, with a short float at 11.86% (equivalent to 6.95 days of average volume). The stock has lost 21.66% over the last year.

6. Finish Line Inc. (FINL): Operates as a mall-based specialty retailer in the United States. Market cap of $1.0B. MRQ Net Profit Margin increased to 1.97% from 1.58% year-over-year, Sales/Assets increased to 0.41 from 0.39, while Assets/Equity decreased to 1.39 from 1.46. The stock is a short squeeze candidate, with a short float at 10.89% (equivalent to 6.49 days of average volume). The stock has gained 13.4% over the last year.

7. Foot Locker, Inc. (FL): Operates as a retailer of athletic footwear and apparel. Market cap of $3.61B. MRQ Net Profit Margin increased to 4.73% from 4.06% year-over-year, Sales/Assets increased to 0.46 from 0.44, while Assets/Equity decreased to 1.45 from 1.47. The stock has gained 25.34% over the last year.

8. Dollar General Corporation (DG): Operates as a discount retailer of general merchandise in the southern, southwestern, midwestern and eastern United States. Market cap of $14.08B. MRQ Net Profit Margin increased to 4.76% from 3.97% year-over-year, Sales/Assets increased to 0.37 from 0.34, while Assets/Equity decreased to 2.14 from 2.45. The stock has gained 34.14% over the last year.

9. Staples, Inc. (SPLS): Operates as an office products company. Market cap of $9.71B. MRQ Net Profit Margin increased to 4.97% from 4.42% year-over-year, Sales/Assets increased to 0.48 from 0.47, while Assets/Equity decreased to 1.90 from 2.05. Might be undervalued at current levels, with a PEG ratio at 0.85, and P/FCF ratio at 11.33. The stock has lost 37.4% 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 $10.87B. MRQ Net Profit Margin increased to 7.04% from 6.48% year-over-year, Sales/Assets increased to 0.64 from 0.63, while Assets/Equity decreased to 2.20 from 2.31. The stock has gained 52% over the last year.

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

Source: 10 Retail Stocks With Strong Sources Of Profitability