They sell cropped workout pants and crop fertilizer; they serve up beer, burritos or blond highlights.
These companies have little in common, really, except that they're America’s new favorite store chains, expanding quickly throughout the country, exciting shoppers when they arrive in their town and generating lush profits along the way.
While delighting consumers with their take on the familiar presented in fresh, convenient ways, these retailers on a hot streak have also enriched their investors. Each of them is arguably in or near the sweet spot of their development. They’re large and mature enough to have perfected their store models, won widespread consumer recognition and reached sufficient scale for effective advertising strategies. They have expanded their locations by 40% to 90% since 2008, in most cases going from regional to national.
Yet their brands, so far, haven’t turned tired or over-familiar, and by their own and analysts’ estimates they are not much more than halfway to their potential size.
Wall Street’s push-pull
Each of these burgeoning retailers qualifies, on Wall Street, as a trendy growth stock. They have a beautifully smooth and deftly executed expansion record, customers reliably flock to make each newly christened shop or restaurant a near-instant money maker, and their stocks are therefore expensive - and magnets for contrarian skepticism.
Each company is valued at or well more than 20-times their expected 2013 profits, in a market that’s paying on average about 15-times company earnings. This means investors are collectively giving the chains a lot of credit upfront for a successful continuance of their fast growth in coming years. Owned as a group, these stocks will probably outperform the broad market in a decent economy for a while to come - but likely because one or two grow to dominate while others plateau or falter.
At some point, every retail chain hits a wall, growing so large it begins cannibalizing its own sales or losing the favor of a fickle and easily distracted customer.
This is why four of the companies on this list have an unusually large percentage of its shares sold “short” by investors betting they will lose value. Short interest in the four bear-targeted names ranges from four- to eight-times as high as the broad market. Expensive, faddish companies always attract naysayers, who are often wrong for quite some time until they’re resoundingly right.
Click through to see, in alphabetical order, the country’s new favorite hyper-growth consumer companies.
Buffalo Wild Wings Inc. (BWLD)
This chain of sports-bar-themed restaurants hawking beer, hot wings and casual camaraderie has burst from 560 to 923 locations since 2008, driving revenue up 146% to $1.04 billion last year and sending per-share earnings to $3.06 in 2012 from $1.36 in 2008. Buffalo Wild Wings shares are up 277% in the past five years to a recent $97.46.
The Minneapolis-rooted chain has adopted a marketing image as an essential place for friends to watch the big game, with TV commercials striking a tone of benign frat-boy team passion, allying themselves closely with major televised sporting events. The goal is to nearly double the store count to 1,700. A major risk to the firm’s profits from quarter to quarter is the volatile wholesale cost of chicken parts – a mark of the intensity of their customers’ wing-gnawing appetites.
Chipotle Mexican Grill Inc. (CMG)
Easily the most ubiquitous and broadly loved of the new consumer favorites, this 20-year-old quick-service pioneer of locally sourced and freshly prepared Mexican-inspired meals is almost a one-company movement. Founded haphazardly in Denver by a classically schooled chef and backed for a time by McDonald’s Inc. (MCD), Chipotle is a dining juggernaut with 1,410 shops in North America, up 68% in four years.
The company is so coveted as an addition to local shopping centers and downtowns that it has pursued a strategy of opening multiple locations in a given market as a way of provoking consumer awareness and cravings to accelerate sales. While it might be over-ambitious, the company figures it can double its store count, and is now rolling out an Asian-themed sub-chain. Chipotle has two million “likes” on Facebook, and its shares are up 300% in the past five years, to $366.
Chipotle is nonetheless is closer to reaching the point when its hefty scale makes difficult the kind of rapid growth its shareholders are implicitly demanding. It remains to be seen how scalable Chipotle’s locally sourced, more-expensive food processes are. A great company, but at an eye-searing 34-times forecast 2013 profits, that’s a lot of beans to pay for a maturing purveyor of admittedly tasty burritos.
Lululemon Atheltica Inc. (LULU)
Lululemon is inarguably the retailer that enjoys the greatest customer passion per square foot of store space in North America. Begun in Vancouver, British Columbia, the company makes carefully crafted active wear such as yoga pants and halter tops that are beloved for their style, quality and performance. It has become a cliché that the duds are something of an everyday uniform for women in certain affluent areas.
When the company famously recalled a series of black women’s yoga pants in March for being too sheer, the stock took a hit, but Lulu’s reputation for intense attention on quality and customer loyalty was enhanced. Under CEO Christine Day, who has said she will soon step down, Lulu has perfected a strategy to use planned scarcity to “train” customers to anticipate and pay hefty full prices for new designs.
The stock is up 300% in five years, ad sales per square foot were an astonishing $2,058 last year, up more than 30% from 2008 levels. It has doubled its store count to 211 since 2008, a small footprint that leaves plenty of room for growth. As a benchmark, Canada Lulu has nearly four times as many stores per capita than it does in the U.S.; other major markets such as Australia, Hong Kong and Germany are being pursued aggressively.
Tractor Supply Inc. (TSCO)
The marketing tag line for this Brentwood, Tenn., big-box chain of farm and yard necessities is “For Life Out Here.” In this case “out here” is America’s rural and exurban districts, where working farms and ranches abut hobbyist gardeners’ homes and weekenders’ retreats.
The company has cleverly found an opening – many openings – in areas not dense enough for a Home Depot but with more local spending power and demand than an Agway or local hardware store can offer. There are close to 1,200 locations, concentrated in the Southeast but stretching nationwide, up from 855 in 2008. Revenues are up 55% in four years and per-share profits grew 160%. The stock is up an astonishing 660% in five years.
Ulta Salon, Cosmetics and Fragrance Inc. (ULTA)
Not as well known as the mall staple Sephora, Ulta has been aggressively spreading beauty across the country in recent years, with store locations growing 85% from 311 in 2008 to 576 now – on the way to a management-stated goal of 1,200.
Selling makeup, skin and hair products and offering hair styling and other spa treatments in its salons, Bolingbrook, Ill.-based Ulta is largely taking business from local shops and department-store cosmetics counters. Earnings and revenue each have more than doubled in the past four years, and its avidly loved – and detested – shares are up more than 700% in five years to a recent $95.
Ulta has a highly promotional management seeking growth at all costs, yet with unimpressive sales per store, modest profit margins and few inherent competitive advantages in its category. Its stated 1,200-store goal is contingent on many more malls being built. Sephora shops within JC Penney Co. (JCP) stores and Amazon.com's (AMZN) beauty category are re-launching. Beware the blemishes beneath what at first seems Alta's pretty image of health and growth.