3 Top Retail Stocks Trading at a Massive Discount to Wall Street Estimates

3 Top Retail Stocks Trading at a Massive Discount to Wall Street Estimates

Retail stocks such as Ulta Beauty and Lululemon Athletica are trading at massive discounts compared to consensus price target estimates.

A weak macroeconomic environment has driven the sell-off in equity markets this year. Investors are concerned over various factors, including interest rate hikes, inflation, supply chain disruptions, and the threat of an upcoming recession. 

Several stocks were trading near all-time highs at the end of 2021 but have lost significant momentum in the last seven months. However, a bear market offers investors an opportunity to buy the dip and benefit from exponential gains over the long term. Here, we look at three quality retail stocks trading at a discount compared to consensus price target estimates. 

Ulta Beauty

One of the largest beauty retailers in the world, Ulta Beauty (NASDAQ: ULTA) sells mass and high-end cosmetics, skincare, and hair beauty products in more than 1,250 stores. It offers over 25,000 products across multiple categories, allowing the company to increase sales from $6.71 billion in fiscal 2018 to $8.6 billion in fiscal 2021 (ended in January). Its e-commerce sales have been a critical driver of revenue growth and have increased at an annual rate of 35% in the last four years. 

In fiscal Q1 of 2022, Ulta Beauty reported revenue of $2.3 billion, an increase of 21% year-over-year, while net earnings rose by 44% to $331 million. Its comparable-store sales in Q1 grew 21.4% due to the reopening of economies. This metric was higher by 15% compared to the pre-pandemic period. 

Last year, Ulta announced a partnership with consumer retail giant Target. Ulta initially installed mini-stores at 100 Target locations and is on track to add another 250 stores in 2022, and this number might eventually expand to 800. 

Ulta Beauty is forecast to report sales of $9.52 billion in fiscal 2022, an increase of 10.2%, while adjusted earnings might expand 12.4% to $20.21 this year. Ulta stock is trading at 2.1x forward sales and 19x forward earnings, which is quite reasonable. It’s trading at a discount of almost 20% compared to Wall Street estimates. 

Lululemon Athletica

One of the most popular athleisure brands on the planet, Lululemon Athletica (NASDAQ: LULU), has returned 386% to investors in the last five years. However, it’s also trading 40% below record highs right now. 

In Q1, the company increased sales by 32% year-over-year to $1.6 billion on the back of higher company-operated store net revenue. In the last three years, its sales have grown at an annual rate of 27%. Lululemon-operated store revenue stood at $731.6 million, accounting for almost 44% of total sales. Comparatively, e-commerce sales totaled $721.3 million, contributing nearly 45% of total revenue. The ongoing pandemic has ensured online sales have grown by 51% annually in the last three years. 

Analysts expect Lululemon sales to rise by 22.2% to $7.71 billion this year, while earnings might expand by 21.7% to $9.48 per share. So, the stock is valued at 4.8 times forward sales and 31 times forward earnings, which is somewhat expensive given the current market conditions. But Wall Street remains bullish and expects the stock to gain over 35% in the next year. 

Skechers

The final retail stock on my list is Skechers (NYSE: SKX) which is grossly undervalued at its current price. Valued at a market cap of $5.76 billion, Skechers is the third largest footwear brand globally. 

The mid-cap stock is currently down over 30% from all-time highs but has returned almost 450% to investors in the last decade. 

In the March quarter, Skechers reported revenue of $1.8 billion, an increase of 27% compared to the year-ago period. Its brand awareness continues to widen as international sales accounted for 57% of revenue in Q1. 

Skechers is on track to increase sales by 16.9% to $7.35 billion in 2022, while earnings might expand by 12% to $2.9 per share. Skechers stock is valued at less than 1x forward sales and a price to earnings multiple of 12.2x, which is very cheap. 

Skechers forecasts sales to touch $10 billion by 2026 on the back of its growing e-commerce business and expansion of physical stores. The stock trades at a discount of almost 50% to consensus price target estimates. 

Read More