Top consumer stocks to own in 2024, according to William Blair

Looking ahead to 2024, William Blair names Chipotle Mexican Grill (CMG) as its Top Pick among the Restaurants group with a belief that the company is well positioned to post healthy comparable store sales growth alongside accelerating unit expansion. In Value-Based Specialty Retail, the firm selects Five Below (FIVE) as its Top Pick with a view that the company can sustain its ongoing top-line momentum against discretionary demand pressures. William Blair also likes Chewy (CHWY) as a 2024 Top Pick for its free cash flow profile and take-out valuation floor. Finally, the firm doubles down on Scotts Miracle-Grow (SMG) with a reiteration of its 2023 Top Picks call, as it believes the risk/reward on the stock remains asymmetrical despite the “disappointing season.”

CHIPOTLE AUVs, MARGINS TO CONTINUE CLIMBING: William Blair is positive on the “high perceived value” and “craveable” food offerings combination at Chipotle Mexican Grill, giving the firm “high visibility” that the company will be able to more than double its domestic footprint to 7,000 locations. At its current AUVs, or average-unit volume, the firm believes that Chipotle’s scale offers a domestic revenue opportunity of at least $20 billion, but also points to the company’s “virtually untapped” international white space that is expected to skew to high-margin licensed arrangements. William Blair further notes that it sees the AUVs for Chipotle continuing to climb given the company’s strong value proposition and the management’s efforts in monetizing its rewards program. The restaurant chain’s unit-level margins are projected at a “stellar” 26% level this year, the firm stated, but William Blair contends that there is further opportunity to drive margin upward thanks to the company’s “Chipotlane” drive-thru initiative, whereby customers can place their order through the Chipotle mobile app and pick it up in the Chipotlane. The order-ahead is Chipotle’s highest margin channel, with about a 50% flow-through to the bottom line, the analysts write.

FIVE BELOW PRODUCT MIX PROTECTS AGAINST DEMAND HEADWINDS: William Blair is also constructive on Five Below heading into 2024. The firm believes that the company’s value-based, youth-centric, and broad assortment of merchandise protects against the more macro oriented pressures on discretionary demand spending as well as the emerging online competition. Five Below has maintained a “healthy” 2.6% year-to-date comps growth, and the company is well positioned for comps growth of at least 4% in 2024, thanks to the upside from expanding brand awareness across a wider set of demographics, product newness, and a new in-house international sourcing team, William Blair asserts. The company’s heavily discounted price range and exclusive product mix should also insulate the Five Below model from potential promotional and deflationary pressures while its experiential stores and “treasure hunt” shopping experience should protect market share, the firm states. In terms of valuation, Five Below’s 28-times expected forward earnings multiple relative to the firm’s target is below the stock’s historical average in the low- to mid-30s range, William Blair stated.

CHEWY’S STRUGGLES SINCE 2021 NOT STRUCTURAL: Shares of Chewy’s have fallen over 80% since their peak in February of 2021, but the issues for the company are not “structural” as it remains a “dominant share-taker” within the pet industry that continues to move online, William Blair states, noting that instead the difficulty for Chewy has been in comping over its “heroic performance” in the pandemic. The Street has been focused on the company’s active customer growth and its churn headwinds, but the company has been reporting “still relatively healthy top-line growth” that is being led by spend-per customer, along with improving margins and free cash flow, analysts write. William Blair further believes that as Chewy’s free cash flow profile approaches its estimated $500M in 2024 and $700M in 2025, the free cash flow opportunity for the company becomes “increasingly harder to ignore”. Moreover, in naming the stock its Top Pick for next year, William Blair contends that while it does not see a natural buyer of the business, the take-out speculation in the wake of the Rover (ROVR) acquisition in November is also likely to keep some floor on Chewy shares.

MARGINS AT SCOTTS MIRACLE-GRO TO GROW FROM 2023 BOTTOM: William Blair has made Scotts Miracle-Gro its Top Pick in 2023 on expectation that greater stability in the lawn and garden business would drive meaningful share price improvement, and while the stock climbed into the high $80’s in February, adverse weather and a consumer who spent more time away from home caused the company’s earnings to miss expectations. Despite the disappointing year on earnings however, the stock did not decline year-to-date, suggesting that the risk/reward for the company is still “asymmetrical” with limited downside and meaningful upside potential, the analysts write, reiterating their call on Scotts Miracle-Gro as a Top Pick heading into next year. The management’s assumptions could prove conservative given the headwinds of last year, while the gross margin for the company have likely bottomed at 23.7% in 2023 and represents a huge expansion opportunity given a long-term average gross margin rate above 30%, William Blair adds. The analysts further indicate Scotts Miracle-Gro may have a reasonable amount of room to safely navigate its debt covenants, with leverage likely peaking Q2.

PRICE ACTION: In Monday midday trading, shares of Chipotle are up about 2% at $2,284, Five Below is up about 1%, and Chewy is up 6% – its biggest single session gain in over six weeks. Scotts Miracle-Gro is down over 2%.