Retail Turnarounds: Five Below and Ollie's

05/04/2017 2:50 am EST

Focus: STOCKS

Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

The retail sector has been a major laggard during the past year. Poor industry results, some high-profile bankruptcies or near bankruptcies and fears of an import tax have all kept the group in the mud, notes Mike Cintolo, editor of Cabot Growth Stock Investor.

But as some of those fears have eased, we’re seeing some potential turnaround situations and new leadership take shape. If earnings season goes well, we could see these retail stocks take a leadership role in the next market upmove.

Five Below (FIVE), which we owned for a time last year, fell from $53 to $35 during the middle of last year before tightening up for a few months — extending what is really part of a huge three-year base.

The company has a unique retail concept (dollar stores targeted at teens and pre-teens) that produces outstanding store returns (payback in about a year), which allows for rapid expansion (store count was up 19.5% last year, with a similar expansion likely this year).

Sales and earnings have been cranking ahead at 20% to 25% and should continue to do so for at least another few years. If retail stocks come back in favor, FIVE remains one of our favorite ideas.

While it’s a bit thinly traded and not a turnaround story, Ollie’s Bargain Outlet (OLLI) has an enticing story, with a unique retail concept with barriers to entry (closeout merchandise).

Its merchant teams are a big differentiator; their connections provide the variety of bargain merchandise its customers love. And closeout availability is way up as so many brick-and-mortar outfits close their doors.

With 234 stores today, Ollie’s is aiming to boost its count by 10% to 15% annually for another decade or so, which should keep sales and earnings rising by 15% to 20% annually. Technically, the stock just lifted to new price and RP peaks.

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