We all know that Amazon Inc. (NASDAQ:AMZN) has completely disrupted the retail space.
With more consumers doing much of their shopping online — many retail companies are living on borrowed time.
Especially when you consider that almost half of U.S. households are now Amazon Prime subscribers, according to a report from Consumer Intelligence Research Partners.
But contrary to popular belief, not all retailers are doomed.
Sure, department stores like Macy’s Inc (NYSE:M) and JC Penney Company Inc Holding (NYSE:JCP) are sleepwalking into their graves. There’s no hope for them.
But a handful of brick-and-mortar retailers have emerged as Amazon-proof.
As senior analyst Jonathan Rodriguez reveals, one small cap stands far above the fray…
The Blueprint for Retail Success
For big retail, it’s been immensely challenging to compete with the $431 billion business-killing behemoth of Amazon.
But it’s not impossible…
Take, for instance, Home Depot Inc. (NYSE:HD) — the nation’s largest home improvement store.
Its customers are mainly contractors and homeowners performing do-it-yourself work on their property (like me).
Sure, Amazon can sell you paint or vinyl siding.
But in most cases, DIY-ers want to see and touch the raw materials going into their projects before purchasing.
Or customers may have questions for staff on the materials — or their end goals — that Google (NASDAQ:GOOGL) just can’t answer.
And for customers who want the flexibility of online ordering and in-store pickup, Home Depot’s 2,278 locations sprinkled strategically across North America make it easy to do just that.
While other struggling retailers are shuttering cash-draining locations left and right to cut costs, Home Depot’s seamless integration of online commerce with thousands of physical locations gives it a huge advantage over Amazon.
Unfortunately, too many retailers got into the e-commerce game late. And efforts to build out an online presence that rivals Amazon are now futile.
So what’s the blueprint for surviving in the Amazon era?
Retailers do three things…
- Address large, specific markets (i.e., homebuilding).
- Leverage their physical storefronts as convenient pickup/drop-off locations.
- Staff their stores with helpful, knowledgeable employees.
Here’s another business that does just that…
Bundles of Joy… Bundles of Cash Flow
Kids are wonderful… As a new dad, I can attest.
They are also major drivers of commerce, particularly where clothing is concerned… As a parent, my wallet can attest.
The Childrens Place Retail Stores (NASDAQ:PLCE) is one of America’s most successful children’s specialty apparel companies.
And with a market cap of $1.9 billion, it’s also one of the smallest.
The company operates more than a thousand locations in North America and another 150 points of distribution worldwide through its international partners.
Since 2013, The Children’s Place has embarked upon a massive restructuring program that includes closing unprofitable locations, optimizing its e-commerce channel and returning more profits to shareholders.
And thus far, the results reflect a successful effort…
Over the last five years, the company has grown earnings per share by 11% — nearly double the growth of broader specialty retail.
Bottom-line growth was driven by the closure of more than 142 stores in the last four years and improved operating margins.
In 2017 alone, full-year net income rose a whopping 77% from last year.
And fourth-quarter earnings, which were reported last month, came in 93% higher year over year from the previous quarter. On the stellar performance, shares soared to a fresh high.
In fact, the stock has gained 69% in the last two years — nearly five times the rise of large-cap consumer discretionary stocks and nine times the Russell 2000.
Revenue growth has lagged the industry. But after several years of declines, the company posted year-over-year sales growth of 3.4% in fiscal year 2017.
Taking Care of Business… and Shareholders
Now, upside in The Children’s Place doesn’t come without risk. After all, 61% of the company’s North American stores are located within shopping malls.
But the company’s fastest-growing division is online sales — representing 20% of 2016 total revenue. So that should offset reduced mall traffic.
The company currently trades at 16 times forward earnings — a 35% discount to the Russell 2000 and a 17% discount to the S&P 500.
Shares yield 1.44%. And to sweeten the pot for income investors, the company doubled its quarterly dividend this year.
Better still, the company boasts a payout ratio of just 8% of free cash flow — meaning the dividend is unequivocally safe.
And the company has approved the repurchase of $250 million worth of stock this year, besting last year’s $151 million of buybacks.
Not to mention the company’s high cash balance and low debt load make it an attractive buyout target.
Put it all together and The Children’s Place represents one of the retail industry’s hottest small-cap investment plays of the year.
On the hunt,