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2 Small-Cap Retail Stocks to Put in Your Shopping Basket

The retail industry has experienced phenomenal growth in recent months, owing to a falling unemployment rate, rising consumer spending, and increased demand for discretionary goods. Furthermore, because the FDA’s full approval of Pfizer-BioNTech’s COVID-19 vaccine could accelerate vaccination rates nationwide, the retail industry is expected to see rising in-store shopping. This, along with the near-zero interest rate environment, we think should drive the performance of small-cap retail stocks The Container Store (TCS) and The Cato Corporation (CATO) in the near term. Let’s discuss.

The retail industry has benefited immensely from the accelerated pace of economic recovery and increased consumer spending over the past few months. According to the National Retail Federation, retail sales are expected to grow between 10.5% - 13.5% to more than $4.44 trillion in 2021. Furthermore, because  the FDA has granted approval to the first COVID-19 vaccine, vaccination rates are expected to improve across the country, boosting in-store shopping activity.

In addition, the declining unemployment rate, continuous government support through fiscal stimulus, and retailers’ strengthening digital infrastructure and home delivery networks are projected to drive the industry's growth.

Moreover, we think small-cap players in the retail space should continue benefiting from the low-interest environment. Therefore, small-cap retail stocks The Container Store Group Inc. (TCS) and The Cato Corporation (CATO) could deliver significant upside in the near term.

Click here to checkout our Retail Industry Report for 2021

The Container Store Group Inc. (TCS)

TCS is a retailer of storage and organizing products and solutions. The Container Store and Elfa are the Coppell, Tex.-based company’s two operational segments. As of April 3, 2021, it operated 93 stores in 33 states and the District of Columbia. It sells its items directly to clients via its website, responsive mobile site, contact center, and other retailers, distributors, and wholesalers.

In May, TCS announced a collaboration with Afterpay, the leader in "Buy Now, Pay Later" payments, to offer flexible spending to consumers in-store and online, beginning next month. Through this partnership, the company aims to provide a stress-free experience to budget-conscious shoppers and further drive its business growth.

Also in May, TCS formed a collaboration to improve the e-commerce experience for customers across all touchpoints in the purchasing cycle. This will enable TCS to expand its brand experience and include order monitoring and alerts. Later this year, the company also plans to provide a fast self-service online returns procedure.

During the first quarter, ended July 3, 2021, TCS’ net sales increased 61.7% year-over-year to $245.32 million. The company reported $26.52 million in operating income, compared to a  $18.62 million operating loss  in the prior-year quarter. Its net income came in at $17.67 million for this period, compared to a $16.67 million net loss in the first quarter of 2020. Its EPS totaled $0.35, versus  a $0.34  loss per share in the prior-year period.

The $1.04 billion consensus revenue estimate for the current year represents a 5% increase from the same period last year. TCS’ stock has gained 187.1% over the past year and 16.9% over the past nine months.

TCS' POWR Ratings reflect this promising outlook. The company has an overall B rating, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

TCS is also rated a B  for Value, Momentum, and Quality. Within the B-rated Specialty Retailers industry, it is ranked #7 of 40 stocks.

To see additional POWR Ratings for Growth, Stability, and Sentiment for TCS, click here.

The Cato Corporation (CATO)

Charlotte, N.C.-based CATO operates as a specialty retailer of fashion clothes and accessories in the Southeastern United States. Retail and Credit are the two segments through which the company operates. Its shops and e-commerce website operates under various brand names, including Cato, Cato Fashions, Cato Plus, It's Fashion, It's Fashion Metro, and Versona.

CATO’s revenue increased 23.9% year-over-year to $205.96 million in the second quarter, ended July 31, 2021. Its cash and cash equivalents grew 44.8% from their year-ago value to $25.35 million. The company’s net income came in at $13.99 million for the quarter, versus  a $7.17 million net loss in the second quarter of 2020. Its EPS amounted to $0.62, compared to a $0.30 loss per share in the prior-year period. The stock has gained 170.4% over the past year and 83% so far this year.

CATO’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our POWR Ratings system. CATO also has an A grade for Momentum, and a B for Growth and Value. The stock is ranked #6 of 40 stocks in the Specialty Retailers  industry.

Beyond the POWR Ratings grades we have just highlighted, on can see the CATO ratings for Sentiment, Stability, and Quality here.

Click here to checkout our Retail Industry Report for 2021

TCS shares were trading at $11.01 per share on Tuesday morning, up $0.13 (+1.19%). Year-to-date, TCS has gained 15.41%, versus a 20.66% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.


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