4 Retailer Stocks to Add to Your Shopping List: Amazon, Dick's, Signet, Ulta
Our picks among retailers range from a jeweler to an Internet giant.
Judging by some of the best-known retail stocks, you’d think America’s shopping malls were ghost towns. Shares of Macy’s (symbol M, $31.31) trade for 57% less than the price they commanded last July. Nordstrom (JWN, $36.68) has plunged by 55% since March 2015. And Kohl’s (KSS, $34.49) has sunk 56% since April 2015. Over the past year through June 14, SPDR S&P Retail ETF (XRT, $41.10), an exchange-traded fund that includes big department stores as well as specialty retailers, lost 16.5%, trailing Standard & Poor’s 500-stock index by a whopping 17.8 percentage points.
And yet the case for retailers should be strong. The economy is growing—not gangbusters, but at a decent clip, with gross domestic product expected to rise 2% this year. Despite the most recent jobs report (which will probably turn out to be an anomaly), the unemployment rate is below 5%. Wages are growing, and consumer spending is up—the latter, at last report, climbing at the fastest pace in nearly seven years.
A closer look at where consumers are spending explains some of the retailers’ malaise. The money is going to experiences instead of goods, to travel, entertainment and restaurants instead of stuff. “The economic backdrop for consumers is favorable,” says S&P Global stock strategist Efrain Levy. “The problem is that spending isn’t going to those categories that help the department stores.”
Retail isn’t dead. But investors have to be about as choosy as a personal shopper for Vogue editor Anna Wintour. You’ll do best with specialty retailers that have a defined and growing niche, or those that can thrive in a market where online shopping is increasingly dominant. We think the four retailers below—a couple in the bargain bin, the others already on the fast track—can buck the dismal trend and ring up respectable gains for investors. (Share prices are through June 14.)
Dick’s Sporting Goods
Sporting goods sales would not appear to be an area of retail strength, given the recent bankruptcy filings by the Sports Authority and the parent company of smaller chains Sport Chalet and Eastern Mountain Sports. Sports Authority is shuttering 463 stores, and in the short term, its aggressive liquidation sales will cut into Dick’s revenues. But considering that 350 Sports Authority stores are within 10 miles of a Dick’s, Dick’s (DKS, $40.31) is likely to grab a good chunk of Sports Authority’s business, boding well for the long term. UBS analyst Michael Lasser says the pressure on Dick’s is temporary and should set the company up for significant acceleration of sales and earnings growth starting in the second half of this year. Analysts, on average, expect Dick’s to earn $2.82 per share in the fiscal year that ends next January, a decline of 2% from the previous year, and $3.43 a share in the year that ends in January 2018. Lasser is more bullish, predicting earnings of $3.60 per share in the January 2018 year. He recommends the stock, with a 12-month price target of $53.
Intrepid investors might find a diamond in the rough in Signet shares (SIG, $83.85). Signet operates the Jared, Kay and Zales chains. The stock is 43% below its October record price, plagued by worries about its financing operation and, more recently, by allegations that employees swapped premium diamonds in customers’ jewelry with less-valuable stones. But Morningstar analyst Paul Swinand believes investors are overreacting to the scandal and misreading the financing arm. “The credit business makes Signet unique,” he says, adding that the quality of the loans isn’t as bad as it looks. Yes, it’s taking longer for loans to get paid off, but that’s partly because Signet has seen increased sales in the high-end bridal market, Swinand says. Moreover, the company is exploring strategic options that might include selling or recapitalizing all or part of its loan portfolio, which would bring in more cash to the retailer. Meanwhile, Signet continues to take market share in a fragmented industry, and that should pay off for patient investors. Swinand says the stone-swapping scandal is “embarrassing and painful, but it doesn’t mean that the company isn’t sound. Even if there’s a lot of muckraking, there’s still value in the shares at these prices.” Swinand says the stock is worth $127 a share, more than 50% above the current price.
Ulta Salon, Cosmetics & Fragrance
Cowen & Co. analyst Oliver Chen looks for retailers that are somewhat shielded from the inroads of Amazon, the 800-pound e-commerce gorilla. This purveyor of beauty products fits the bill, catering to customers’ needs for in-store product testing and personalized service.
Ulta (ULTA, $237.84) offers more than 500 brands of cosmetics, fragrances, hair care and skin care products, operating 715 stores in 47 states. The company’s loyalty program, which drives 80% of sales, is a strong competitive advantage. If the stock’s price-earnings ratio—37, based on estimated year-ahead earnings—is sky-high, so is the company’s growth, says Chen, who recommends the shares. But earnings are growing at a 20%-plus annual pace, and revenues have been surprisingly strong, given the tough retail environment. Sales at stores open at least a year, a key measure in retailing, jumped 15% in the quarter that ended April 30 from the same period in 2015, crushing Wall Street expectations. Still, Chen’s one-year target price for the stock, $246, is just 3% higher than Ulta’s current price, so this is a stock best bought on dips.
The e-commerce giant is the biggest beneficiary of a long-term shift from brick-and-mortar stores to online shopping. Amazon is many things: a cloud-computing company, a media content business—it’s even into robots. But Amazon (AMZN, $719.30) is first and foremost a retailer, with more than two-thirds of its revenues in the first quarter coming from its electronics and general merchandise unit. The company is involved directly or indirectly with 80% of U.S. e-commerce traffic, according to estimates by analysts at Canaccord Genuity, who recommend the shares. By 2017, Amazon will eclipse Macy’s as the number-one apparel retailer in the U.S., measured by the value of merchandise sold, says Cowen & Co. Amazon’s stock can be volatile, and it is far from a bargain, trading at 110 times estimated year-ahead earnings. And yet, Canaccord notes, long-term potential growth remains enormous, considering that globally, e-commerce currently accounts for less than 7% of retail sales.