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3 stocks for scaring up Halloween profits
Halloween alone is now a $7 billion a year business, and a number of specialty retailers work to profit from the business of scaring people. Here are the three best.
By Robert Walberg
Fresh off the back-to-school season, shoppers are gearing up for Halloween. Make no mistake about it: This kids holiday has turned into big business.
Consumers spend more money -- roughly $7 billion -- on Halloween accessories and decorations than any other holiday except for Christmas. Though mega-stores such as Wal-Mart Stores (WMT, news, msgs) and Target (TGT, news, msgs) will do their fair share of sales during this period, I want to look at some of the smaller, specialty stores that are positioned to scare up profits and reward investors with a late-year treat for their portfolios.
Aside from the large general merchandise stores, there are two basic groups that offer a variety of Halloween accessories and decorations. Crafts stores such as A.C. Moore Arts & Crafts (ACMR, news, msgs), Michaels Stores (MIK, news, msgs), Jo-Ann Stores (JAS, news, msgs), Hancock Fabrics (HKF, news, msgs) and Rag Shops (RAGS, news, msgs) make up the first group. Party City (PCTY, news, msgs) and Factory Card & Party Outlet (FCPO, news, msgs), a couple of party-supply specialty retailers, comprise the other entrants in this relatively narrow field.
Breaking down the numbers always helps when it comes to stock selection. But when reviewing the retail sector, nothing beats a little hands-on experience. In fact, the Peter Lynch approach -- investing in what you know and understand -- works very well in the retail space because each of us is capable of doing our own research simply by walking through the aisles.
Craftiest of the craft shops
I began this weeks field research by hitting the craft stores in the Chicago area. You dont have to be the next Martha Stewart to realize that Michaels Stores is the king of this space -- and for good reason. Its stores are generously sized without overwhelming. Merchandise is well displayed and logically laid out. There are the usual discounts on seasonal merchandise but nothing extraordinary. Otherwise, pricing is competitive while the breadth of product clearly separates it from the likes of Wal-Mart and Target. There could be a few more sales people, but those that were there knew the stores and the merchandise.
Similarly, Jo-Ann stores offer a wide variety of sewing, craft and seasonal-related merchandise. The stores I visited were a little dated and a bit too bright for my liking. They were busy, however. More importantly, people in the store were actually buying things. Theres not a lot of space devoted to Halloween merchandise -- about two-to-three aisles -- but what was available was moving off the shelves relatively briskly. The 40%-50% off signs didnt hurt, as the company is already trying to clear space for the upcoming barrage of Thanksgiving and Christmas decorations. Sales help was friendly and knowledgeable, especially when it came to fabric necessities.
My final trip in this area was to Hancock Fabrics. With only about half as many stores nationwide as Michaels and Jo-Ann Fabrics, Hancock is clearly a second-tier player in this marketplace. Even more so when it comes to seasonal holiday merchandise, as there were only a few displays with any Halloween merchandise on them. Crafts are also secondary, as the companys primary focus is definitely on fabric.
On that score, it has more high-end fabric choices than Jo-Ann Fabric, but it wasnt doing nearly the business on either day I visited these stores. Lets face it, with apparel retailers offering so many reasonably priced clothing options, the pool of people willing to devote time to making their own clothes is getting smaller and smaller all the time. This is a niche business, and Hancocks slice of the pie is getting smaller not bigger -- not a good thing.
Given that Rags Shops and A.C. Moore Arts & Crafts are East Coast outfits, I wasnt able to do any first-hand research. However, both are relatively small. Rags Shops operates about 70 stores; A.C. Moore Arts & Crafts has more than 80. There are a couple of big differences. First, Rags traditionally operates much smaller stores -- about 11,000 square feet vs. 20,000-to-25,000 square feet. Second, A.C. Moore sports a market cap of $447 million to only $20 million for Rags. Finally, and most importantly, A.C. Moores financials and sales histories have been far superior to those of Rags. In fact, the sluggish Rags recently announced it will be acquired by Sun Capital Partners for $4.30 a share. Its not clear when the deal will close.
Havin' a Halloween party
Turning our attention to the party supply retailers, there is again little question as to which company dominates the space. Party City is the place to go if youre looking for specialty plates, napkins, cards, balloons, etc. No matter what the party theme, this place has something for you.
Halloween is one of the companys biggest holidays. It turns part of its stores into a Halloween center offering everything from masks to coffins to make-up to full costumes for every age and every budget. With 500 stores owned or franchised (about evenly split) across the country, Party City is well-positioned to take advantage of what is shaping up to be a strong Halloween holiday.
Factory Card & Party Outlet may be a little less cluttered than Party City. Unfortunately, that is true not only of the merchandise displays, but the aisles themselves. The stores werent very crowded. There was a feeling of death hanging over the stores I visited, and it had nothing to do with getting into the Halloween spirit. The stores simply dont look like theyre going to survive. Too much space is devoted to stationary and cards -- all items that can be found at other places at equal or better prices. Theres also not much sales help -- an obvious cost-cutting measure.
The company emerged from bankruptcy a couple of years ago. While earnings are expected to ramp higher next year, according the one analyst that follows the company, discounted valuation is not a good enough reason to invest in this struggling retailer. The stock is down nearly 49% over the last year.
Three names rule the night
As is often the case, the numbers support the field research. Party City and Michaels Stores crush the competition when it comes to operating margins and returns on equity (ROE). These two stocks are also the only two in the group to be up over the past 52 weeks, with gains of 19% and 31%, respectively. In addition, each offers superior earnings growth, with Party City expected to grow its bottom-line by 25% in the current fiscal year and Michaels Stores by nearly 20%. It should also be noted that Michaels Stores recently announced a two-for-one stock split and a modest hike in its dividend.
However, there is a third company that should pick up momentum going into next year: A.C. Moore Arts & Crafts. With just 80 stores nationwide, theres plenty of room for the company to expand beyond its East Coast roots. Also, a new distribution center and attention to improving margins should keep the company growing at an industry-leading 20%-plus over the next few years. At 23 times this years estimated earnings and 17.9 times next years projection of $1.30 per share, the company isnt cheap, but strong growth and clean financials suggest that it should maintain premium multiples going forward. Dont be surprised if the stock runs up and tests gap resistance near 27 over the next three-to-six months.
Fortunately, there arent many tricks to picking out the probable winners this Halloween season. In the crafts business, Michaels and A.C. Moore have it sewn up. In the party supply business, its all Party City.
At the time of publication, Robert Walberg neither owned nor controlled shares in any equities mentioned in this column.
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