One of the groups with the biggest earnings beat this quarter is retailers. These stocks are benefiting from increased store traffic and strong consumer spending. Three small-cap retailers that investors should consider are Haverty Furniture (HVT), The Container Store (TCS), and Sally Beauty Holdings (SBH).

In the current market environment, investors must remain cautious and selective when picking stocks.  Though the Dow Jones and S&P 500 continue to remain strong, with both indices just a couple of percentage points away from their all-time highs, the Nasdaq and Russell 2000 have been experiencing more significant pullbacks. 

And over the last month, the percent of stocks in the S&P 500 trading above their 50-day moving average has dropped from above 90% to 72%. Similarly, the number of stocks on the New York Stock Exchange making new highs has dropped from averaging above 400 to around 100 over the last month. 

With this in mind, I believe one industry that investors should watch is the retail industry. Retail companies are benefiting from stimulus payments and the economy reopening and should continue to outperform in 2021. Further, many retailers posted strong Q1 results and issued guidance above expectations. 3 small-cap retailers that investors should consider are Haverty Furniture, The Container Store, and Sally Beauty Holdings.

Haverty Furniture

HVT is a furniture retailer with over 100 locations in 16 states. It’s one of the largest furniture companies in the South and began in 1885 with a single location in Atlanta, Georgia. The company has benefited from the pandemic as spending on home goods sharply increased. It’s also starting to invest in its online sales channel and starting to gain traction. 

HVT made some headlines earlier in the month, following a nearly 20% gain after it posted very strong Q1 results. The company had a huge beat with $1.04 in EPS, while analysts were forecasting $0.46 per share. Revenue came in at $237 million vs expectations of $206 million. This marks HVT’s 3rd earnings surprise out of the last 4 quarters.  

Like a lot of retailers, TCS is benefiting from strong consumer spending and the economy’s reopening as there is pent-up demand for people to visit and shop in stores. Its last earnings report demonstrated this as TCS delivered revenue of $315 million, a 30% increase from last year. EPS was $0.69, topping expectations and a significant improvement from last year’s $0.26 in the same quarter. 

Spending on items that TCS sells is naturally higher with a strong housing market. And, the housing market seems to be in the beginning stages of a multiyear, bull market based on low housing supply and demand driven by demographics.

TCS’ POWR Ratings reflect this promising outlook. The stock has an overall A rating, which equates to Strong Buy in our proprietary rating system. It has an A for Value which is consistent with its forward PE of 16.2 which is cheaper than the S&P 500 despite having faster revenue and earnings growth. 

Sally Beauty Holdings

Last year at this time, SBH’s prospects were quite bleak. The company had total equity which was flirting with going negative, leading to the risk of potential bankruptcy if there was no turnaround. Additionally, as a small company with limited resources, it was difficult for the company to pivot to online sales. Further, sales of beauty products declined for obvious reasons during the pandemic.

Even with the stock market’s bottom in March 2020, SBH didn’t participate as it traded in a range and double bottomed in November. However, the company’s fortunes made a U-turn when the vaccine news came out. This meant that there was a light at the end of the tunnel for SBH. Now, the company is benefiting as traffic to stores is strongly rebounding with pent-up demand for beauty products.

The company is attractive from a value and growth perspective. It has a price to earnings ratio of 10.4, while analysts are expecting another 15% growth in revenue next year. The strong housing market and consumer spending figures are also supportive of sustained strength. Further, it pays a 2% dividend and has a track record of consistently increasing its dividend over the years. 

It’s no surprise that HVT has an overall A rating given these strong fundamentals, which equates to a Strong Buy in our POWR Ratings system. A-rated stocks have posted an average annual performance of 30.7% which compares favorably to the S&P 500’s annual performance of 7.1%. 

The POWR Ratings also evaluates stocks by various components. HVT has a Quality grade of A which is consistent with its long history of steady expansion through multiple market cycles. Another indication of its quality is the company’s dividend history. To see more of HVT’s component grades including Value, Growth, Momentum, Sentiment, Stability, and Industry, please click here. 

The Container Store

TCS is one of those stores that makes no sense to a certain demographic but is loved and cherished by other demographics. The company sells items that help with organization such as custom closets, installation services, shelves, drawers, and other customizable accessories. 

The company got a boost last year when it signed a deal with Marie Kondo to produce 100 products to create a tidy and joyful environment. This initiative is expected to drive online and in-store traffic as well as increase the company’s visibility with younger consumers. 

This stark improvement is evident in its latest earnings report. SBH posted a massive beat with $0.57 per share in Q1, while analysts were looking for $0.14 per share. This was a 148% improvement from Q1 last year. Revenue also came in higher than expectations at $926.3 million vs $828 million.   

SBH’s turnaround is reflected in its improving POWR Ratings. Currently, the stock is rated a B which translates to a Buy rating. Due to the numerous macro trends driving sales and earnings higher, it’s not surprising that SBH has a B rating for Growth. To see more of SBH’s component grades including Value, Momentum, Stability, Sentiment, Quality, and Industry, click here. 

SBH shares were trading at $21.38 per share on Monday afternoon, down $0.55 (-2.51%). Year-to-date, SBH has gained 63.96%, versus a 12.63% rise in the benchmark S&P 500 index during the same period.