In this article, I've assessed the potential of two well-known specialty retailer stocks, GameStop Corp. (GME) and The ODP Corporation (ODP), aiming to identify the better long-term buy. After conducting a comprehensive fundamental analysis, I conclude that ODP presents a more favorable investment choice, as detailed throughout this piece.

Before delving into the analysis of these stocks, let's first examine the current dynamics in the retail sector.

Despite economic uncertainties and inflationary pressures, consumers continue to spend. In July, U.S. retail sales surged by 0.7%, outpacing the previous month's 0.3% increase and surpassing economists' expectations of a 0.4% rise.

Driven by robust consumer demand and increased prices due to inflation, this marked the fourth consecutive month of rising retail sales.

Moreover, as per the National Retail Federation’s (NRF) annual forecast, retail sales are expected to grow by 4% to 6%, reaching between $5.13 trillion and $5.23 trillion in the current year. Moreover, non-store and online sales, which are included in the total figure, are expected to grow between 10% and 12% year over year to a range of $1.41 trillion to $1.43 trillion.

In addition, the specialty retailer market is expected to receive a boost from rising consumer demand and increased disposable income. The integration of digital retailing, which enhances the in-store experience through technology, is projected to drive market growth further.

As a result, the global specialty retailer market is expected to reach $42.7 billion by 2031, growing at a CAGR of 4%.

Furthermore, despite the persistent inflation, the global retail market is expected to reach $37.66 trillion in 2027, growing at a CAGR of 7.4%.

In terms of price performance, ODP has demonstrated a gain of 33.9% over the past year, starkly contrasting GME's decline of 49.7%. Looking at the past three months, ODP has surged by 17.7%, while GME has faced a loss of 29.7%. Year-to-date, ODP has delivered a return of 6%, while GME has experienced a decline of 11.4%.

Here are the reasons why ODP could potentially perform better in the near term:

Latest Developments

On June 1, 2023, GME and The Telos Foundation announced a strategic partnership to integrate the Telos blockchain into GameStop's upcoming Web3 game launcher, GameStop Playr.

This collaboration aims to introduce Web3 gaming to mainstream users and enhance the global GameFi ecosystem. It will enable users to access Telos-supported Web3 games, leveraging Telos' decentralized blockchain known for scalability, affordability, low environmental impact, and reliable uptime.

On the other hand, on August 23, ODP’s operating company, ODP Business Solutions, announced the release of its 2023 Diverse Supplier Catalog, featuring the company’s complete assortment of products sold by diverse vendors.

Moreover, during the second quarter of the year, ODP repurchased 724 thousand shares for $31 million.

Recent Financial Results

GME’s revenues declined 10.3% year-over-year to $1.24 billion in the first quarter ended April 29, 2023. Gross profit fell 3.7% year-over-year to $287.30 million, while its adjusted EBITDA loss amounted to $29.40 million.

The company’s adjusted operating loss amounted to $51.20 million. Also, its non-GAAP net loss came in at $42.30 million and $0.14 per share.

In contrast, ODP’s sales amounted to $1.91 billion in the fiscal second quarter that ended July 1, 2023, while its gross profit stood at $415 million. Its adjusted operating income came at $53 million.

In addition, its adjusted net income was $39 million, while adjusted EPS from continuing operations increased 25.3% year-over-year to $0.99. The company’s adjusted EBITDA amounted to $86 million.

Past and Expected Financial Performance

GME’s revenue and total assets declined at 6.9% and 6.6% CAGRs over the past five years. Its EPS is expected to amount to negative $0.14 in the to-be-announced and current quarter and negative $0.26 in the current year. Its revenue is likely to stand at $1.14 billion in the to-be-reported quarter, $1.16 billion in the current quarter, and $5.71 billion in the current year.

In contrast, over the past five years, ODP’s net income and EPS grew at 14.3% and 20.1% CAGRs, respectively. Its EPS is expected to amount to $1.59 in the current quarter, $0.82 in the next quarter, and $5.20 in the current year. Its revenue is likely to stand at $2.05 billion in the current quarter, $1.95 billion in the next quarter, and $8.01 billion in the current year.

Profitability

ODP is more profitable, with EBIT and EBITDA margins of 3.12% and 4.03% compared to GME’s negative 2.98% and 1.97%, respectively.

In addition, ODP’s ROCE, ROTA, and ROTC of 15.71%, 4.82%, and 7.22% are higher than GME’s negative 15.11%, 6.70%, and 5.41%, respectively.

Valuation

In terms of forward EV/Sales, ODP is currently trading at 0.30x, lower than GME, which is trading at 0.75x. ODP’s forward EV/EBITDA multiple of 5.87 is relatively lower than GME’s 385.85.

Hence, ODP is more affordable.

POWR Ratings

GME has an overall rating of D, which translates to Sell in our proprietary POWR Ratings system. ODP, on the other hand, has an overall rating of B, which equates to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. GME has a grade of D for Value. Its forward EV/EBITDA multiple of 385.85 is significantly higher than the industry average of 9.55x. Its forward Price/Sales of 0.87x is 4.1% higher than the industry average of 0.84x.

However, ODP has a grade of B for Value. Its forward EV/EBITDA multiple of 5.87 is 38.6% lower than the industry average of 9.55. Its forward P/S of 0.23x is 72.7% lower than the 0.84x industry average.

In the 43-stock Specialty Retailers industry, GME is ranked #41, while ODP is ranked #4.

Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, Stability, Quality, and Sentiment. Get all GME ratings here. Access ODP ratings here.

The Winner

U.S. retail sales surged in July, showcasing the resilience of consumer spending and presenting an optimistic outlook for the retail sector. Moreover, the specialty retailer market also stands to benefit from heightened consumer demand and greater disposable income. The integration of digital retail technology further bolsters the sector.

Although both GME and ODP have the potential to benefit from favorable industry conditions, GME's burden of losses in the recent quarter, weak profitability, and elevated valuation multiples indicate that ODP is the wiser long-term investment choice.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Specialty Retailers industry here.

What To Do Next?

Get your hands on this special report with 3 low priced companies with tremendous upside potential even in today’s volatile markets:

3 Stocks to DOUBLE This Year >

ODP shares were trading at $48.11 per share on Friday morning, down $0.15 (-0.31%). Year-to-date, ODP has gained 5.64%, versus a 15.38% rise in the benchmark S&P 500 index during the same period.

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.

More...