Source: moneycontrol.com.

Overview

Demographic shifts often drive secular growths. You may immediately think of the aging population, which could be the key contributor to the long-term prospect of healthcare companies like Novo Nordisk (NVO) and Waters (WAT).

How about gender-wise? What if I told you that approximately 45% of prime-working-age women in the U.S. would be single by 2030, or that single women outspend the average household a per-person adjusted basis? Don’t take my word for it. These are from a recent 35-page study titled “Rise of the SHEconomy” by Morgan Stanley (MS). The investment bank argues that SHEconomy is booming and fueling more economic growth than the part driven by men.

This echoes the Economist magazine’s previous assertion that women (instead of China or technology) represent the largest growing economic force in the world. The dominant trends here, besides the increasing percentage of single women with more spending power, are the expanding women workforce and diminishing wage gap between males and females. All these trends are unarguably happening in many markets – developed ones and developing ones – not just the US, and do not seem to stop anytime soon given current societal constructs pushing towards greater gender equality and female empowerment.

Strategy

So how should investors ride the secular trends assuming that the demographic tailwind remains in play for the foreseeable future? As a value/quality investor, I am always keen on buying only good companies. A system like Urbem Quality Score would help me filter out the mediocre and the poor.

Again, for those who are not familiar with the Urbem Quality Score, the system is simply a quantitative model ranking businesses mainly based on the following fundamental factors:

  • Returns on capital and their consistency
  • Capex requirement to sustain year-to-year operations
  • Cash flow
  • Balance sheet
  • Growth health

For the 100 stocks earning the highest scores, I picked the top 5 companies that provide products and services mainly targeting single women and/or working-class women, as follows.

Lululemon (LULU)



Source: Lululemon.com.

Lululemon Athletica is the designer, distributor, and retailer of healthy lifestyle inspired athletic apparel and accessories. While providing a comprehensive line of apparel and accessories, the company is most well-known for its Yoga-related products. That is why women make up the primary and largest customer group for Lululemon.

For the past few years, the business has been benefiting from the growing number of people that participate in yoga. The EPS increased at the annual rate of almost 30% on average since 2009, and the FCF per share followed the trend of EPS, indicating healthy growth. Analysts forecast a CAGR of 6% for the global yoga apparel market going forward. So Lululemon should be able to see more good days ahead.



Source: GuruFocus; data as of 8/23/2019.

The management also demonstrated decent capital allocation skills, by holding the annual returns on tangible assets above 15% every year over the past decade (see below).



Source: GuruFocus; data as of 8/23/2019.

Shares of Lululemon appear to have never been cheap. The current P/FCF is a hefty 64x. The recent-year lows were around 30x, which offers a much more reasonable entry point. Even with a high-teens CAGR moving forward as estimated by GuruFocus, I can do nothing but put the name on my watch list at this level.



Source: GuruFocus; data as of 8/23/2019.

Estee Lauder (EL)



Source: jingdaily.com.

The Estee Lauder Companies is one of the world’s leading manufacturers and marketers of quality skincare, makeup, fragrance and hair care products. Its products are sold in over 150 countries and territories under several well-known brand names, including Estee Lauder, Clinique, Origins, Jo Malone London, and many more (see below).



Source: 2018 Annual Report.

As you can imagine, most of the brands are quite popular among female consumers. The global beauty and personal care products market is expected to grow at a CAGR of 7.2% through 2023, creating significant industry tailwind for Estee Lauder.

Both the earnings and free cash flow at the company grew at almost 10% on an annualized per-share basis (see below) over the past decade, partially propelled by the booming SHEconomy.



Source: GuruFocus; data as of 8/23/2019.

In the meantime, the business generated more than 10% annual returns on tangible assets in 9 out of the 10 years or every year after the financial crisis (see below).



Source: GuruFocus; data as of 8/23/2019.

The valuation of the share does not look encouraging, with P/FCF at the high end of the trading range for the past 10 years (see below). I would consider an entry point when the P/FCF drops below 30x at least (i.e., more than 3.3% free cash flow yield).



Source: GuruFocus; data as of 8/23/2019.

Ross Stores (ROST)



Source: kiplinger.com.

Operating under the brand name “Ross Dress for Less” and primarily targeting middle-income households, Ross Stores is the largest American chain of off-price department stores.

On average, almost three out of four visits to the stores are female, shopping for herself or other family members. Customers often spend time shopping for bargains. They generally enjoy the “treasure hunting” experience, which is hard to replicate online, and hence, makes the business Amazon-proof. Check the chart below for a detailed merchandise breakdown.



Source: Investor Presentation, May 2019.

For the past 10 years, Both EPS and free cash flow per share increased at the annual rate of approximately 20% (see below). The uptrend of earnings appears a bit bumpy because of the seasonality nature of the retail industry.



Source: GuruFocus; data as of 8/23/2019.

Meanwhile, the management at Ross Stores did a great job in allocating capital, improving the annual returns on tangible assets from 13% in 2009 to 27% this year.



Source: GuruFocus; data as of 8/23/2019.

The current share price of ROST appears fair if compared to its historical levels in terms of P/FCF, as demonstrated below. For long-term buy-and-hold investors, a 5% free cash flow yield could be a good entry point to establish a small position before accumulating more shares later on.



Source: GuruFocus; data as of 8/23/2019.

Steve Madden (SHOO)



Source: vmsd.com.

Steven Madden designs, sources, markets and sells fashion-forward footwear and accessories. In addition to marketing products under its own brands including Steve Madden, Dolce Vita, and Betsey Johnson, Steve Madden is a licensee of various brands including Kate Spade, Superga, and Anne Klein.

The total company maintains its market leadership in the US women’s fashion footwear market, with an 8% market share. The Steve Maden brand alone is the 3rd popular brand on women’s minds in the US when it comes to fashion footwear, only after Skechers (SKX) and Nike (NKE). The total women’s footwear market is expecting a mid-single-digit annual growth rate until 2027.

The business achieved a high-teens CAGR in EPS in the past 10 years. As demonstrated below, the free cash flow hovered around the EPS line in the meantime, indicating the high quality of earnings.



Source: GuruFocus; data as of 8/23/2019.

The annual returns on tangible assets have been maintained at above 15% during the past decade, except for 2009 (see below).



Source: GuruFocus; data as of 8/23/2019.

With regards to current valuation, the stock seems cheap. The free cash flow yield is over 6% at the moment. Compare this to the miserable ultra-low and even negative bond yields around the globe, and you may want to agree that a lot of margin of safety is already priced in.



Source: GuruFocus; data as of 8/23/2019.

According to the table below, all prevailing price multiples (i.e., P/E, P/B, P/S, P/CF) are lower than their respective historical averages.



Source: Morningstar; data as of 8/24/2019.

The stock price of SHOO slumped late last year and did not recover so well ever since. The main reasons here, in my opinion, were that Mr. Market was not so convinced of the long-term growth story of Steve Madden and the fear around the retail landscape. However, for those who buy in the secular trend of growing SHEconomy, SHOO may be a good candidate worth looking at.



Source: shopinternationalplaza.com.

Pandora A/S is an international Danish jewelry manufacturer and retailer best known for its customizable charm bracelets, designer rings, necklaces, and watches.

The fine jewelry market is seeing a CAGR of 6% for the next couple of years, partially driven by the growing SHEconomy.

The company has been actively working on its brand relaunch globally since the business growth stalled a couple of years ago. Over the last decade, the EPS increased at a CAGR of 30% despite the recent headwinds, and the free cash flow follows earnings closely (see below).



Source: GuruFocus; data as of 8/23/2019.

The management demonstrated superior capital allocation skills by delivering the returns on tangible assets that never dropped below 30% for the past 10 years (see below).



Source: GuruFocus; data as of 8/23/2019.

An almost 20% free cash flow yield is indicating that the stock of Pandora is a bargain as well as the extremely bearish sentiment among investors. The last time when the share traded this cheap was in 2012 (see below) when soaring material costs pressured margins and caused mistaken pricing strategy, sales were stagnant, and then the then CEO stepped down. For the last few quarters, investors have been seeing similar developments, except for the material cost issue (the company now manages this well through hedging).

For those who believe in the come-back of Pandora (as the company made through a few years ago) and have the appetite for the business risk inherent in the fast-moving fashion trends, the current share price should present an attractive entry point for long-term buy-and-hold investors.



Source: GuruFocus; data as of 8/23/2019.

Summary

My 5 top-quality SHEeconomy picks, as detailed above, cover the discount retail, beauty and personal care, apparel, footwear, and jewelry industries, all of which, represent important spending categories for women.

Although I believe that all the names here represent decent opportunities to profit from the growing SHEconomy (for the long run, of course), each stock trades in their respective valuation situation. Value/quality investors should closely follow good companies, wait patiently, and accumulate their shares at fair or cheap (hopefully) prices only.

What is your favorite SHEconomy stock? Feel free to comment below.

Disclosure: I am/we are long ROST, NKE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Mentioning of any stock in the article does not constitute investment recommendations. Investors should always conduct careful analysis themselves and/or consult with their investment advisors before acting in the stock market.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.





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