Finding a thriving brick-and-mortar retailer today is like finding an oasis in the desert – or a palm tree in the arctic.
But in spite of the Retail Ice Age haunting the industry, there is one retailer with over 900 locations that has managed to keep its business sizzling.
And this retail stock is so undervalued right now that a 100% jump could just be the beginning.
The difference is all about the “Amazon Effect.” Online retail, led by Amazon.com Inc. (Nasdaq: AMZN), has been undercutting brick-and-mortar to the point that it can’t compete.
The numbers over the last several years have been bleak.
A record 105 million square feet of brick-and-mortar retail space was taken offline in 2017.
As of April 2018, a commercial real estate services firm said that 90 million square feet was already scheduled to close this year, with a high likelihood that more will follow.
This could be a record-shattering year for retail, and not in a good way.
The examples seem endless…
- Sears Holdings Co. (Nasdaq: SHLD), which has gone from 1,980 stores in 2013 to just 1,002 as of February, has announced the closing of more than 190 stores so far this year.
- Foot Locker Inc. (NYSE: FL) closed more than 140 stores around the world last year and expects a net loss of 70 more in 2018.
- Michael Kors Holdings Ltd. (NYSE: KORS) announced last May that it would close 125 stores.
- American Apparel, Claire’s, Toys R Us, and Payless, among others, have all filed for bankruptcy.
But there is one specialty retailer that isn’t feeling the pinch. In fact, this company is doubling down on its brick-and-mortar locations. It acquired 11 of its franchise stores in Maryland last March, making 814 of its 951 stores now owned by the company.
It also adds another 300-plus pop-up stores during its busy season. And no, we’re not talking about Christmas.
You see, this company is more than just a “retailer.” It manufactures a lot of its own products and operates a wholesale business in addition to its retail locations.
Because of its market share – as much as 60% worldwide for some of its products – it doesn’t matter where or how the products are sold. Whether through its stores or via another outlet, this company is going to be the beneficiary.
The other reason it’s been able to fend off the Amazons of the world is the nature of the merchandise. You certainly can order these types of products online. But, as we’ll soon see, most people don’t want to.
Especially when you need something right away and need it to be just right – online ordering won’t do.
Let’s take a look at this brick-and-mortar standout that could double your investment…
How This Brick-and-Mortar Retailer Gives Shareholders a Reason to Celebrate
We’re talking about Party City Holdco Inc. (NYSE: PRTY). The company operates more than 900 stores globally that offer about 30,000 party supply products, including balloons, costumes, and all sorts of decorative items.
And when Halloween comes around, those 300 or so extra pop-up stores are dedicated entirely to the holiday. Customers can buy anything from simple face paint or cobweb decorations to fully decked-out “Star Wars” costumes for a group of friends.
The first reason to go to Party City rather than order online is, quite simply, fun. Unlike the tiresome chore that most shopping amounts to, shopping for party supplies is often part of the experience. And being in the store gives customers the chance to coordinate on the spot.
But even for those who would rather shop online, parties and holidays always come with a deadline. And no one wants to order something online only to discover it’s not quite what they were expecting the day before the event.
You might think a retailer that specializes in party supplies would be subject to reversals of fortune any time the economy swings up or down. But that’s not the case. In fact, while families may cut down on dining out and live events in tough times, they still celebrate holidays and birthdays. And spending a little money to spruce those events up is often well within even a modest household budget.
“Party goods are an economical means by which to make events and occasions more festive,” the company said in its financial reporting, “and, as a result, have continued to sell well during economic downturns.”
70% of Party City’s retail products are vertically sourced – either through its own manufacturing unit or a manufacturing partner. The company’s designers develop about 8,000 new products every year and 50 new coordinated ensembles.
Those designers haven’t been shy about trying out new ideas. This year, Party City became the first national retailer to offer a range of decorations for Ramadan and Eid al-Fitr, and early reports from the company are showing “very strong” demand.
The company is a market leader in many of its manufacturing segments. For metallic balloons, for example, it has a 60% global market share.
At the wholesale level, the company distributes around the world, with no one customer accounting for more than 10% of third-party sales.
It hasn’t ignored e-commerce, either. About 9% of Party City’s retail sales are made through its online store.
All that translates to a rare retailer that is poised for continued growth even in the Amazon era. In fact, the numbers show that PRTY is severely undervalued right now, making it the perfect time for savvy investors to grab it.
Crunching the Numbers: Why Party City Is a Strong Buy Now
Since Party City went public in 2015, it has increased earnings per share (EPS) every year. The company is expected to finish 2018 with an impressive 48% growth in EPS. And at current forecasts, that figure will more than double, from 1.24 to 2.60, by 2021.
But that estimate could be low. Party City has met or beaten expectations in 10 straight quarters.
That shows us the growth this company can generate internally. But what’s just as important is how undervalued the stock is right now.
And it’s not just undervalued because it’s a retailer. Party City is drastically undervalued relative to the rest of the industry. That shows up in just about any metric.
Its trailing P/E ratio is at 7.9, compared to an industry average of 17.35. Its forward P/E ratio is 7.6, compared to an average 16.62. Its trailing PEG ratio – a measure by which a fairly priced stock should score a 1 – is just 0.35. And its price-to-book ratio – a comparison of its stock price to its net asset value – is at 1.4. That’s less than a third of the industry average, 4.66.
In other words, even if we overlooked the company’s outstanding earnings growth, the stock price could bounce 100% to 230% just to be valued fairly relative to its peers.
Add that to 110% earnings growth by 2021, and you’ve got a veritable hidden gem among brick-and-mortar retailers.
Memorial Day and summer parties are coming up soon, and then comes the real busy season. Now is a perfect time to pick up this stock before the celebrations begin.
— Stephen Mack
Source: Money Morning