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All Contents © 2018The Kiplinger Washington Editors
By James Brumley, Contributing Writer
| November 1, 2017
Halloween decorations are coming down, and the 2017 holiday shopping season is starting to ramp up, meaning it's once again time to put retail stocks on your radar. While most people will be eyeing the circulars stuffing their mailboxes and newspapers in search of the best prices for toys, electronics and apparel, investors will see a different angle — opportunities to take a compelling position in retailers, preferably before Black Friday gets here.
While long-term investors normally shouldn't care much about a Christmastime trade, consider this:
The current state of the industry has been brutal for some retailers, but it also has become an opportunity for survivors of the so-called retail apocalypse. Turnarounds are in view for a few of these stocks, and the upcoming busy shopping season may be more than grounds for a quick trade — they may cement some turnaround efforts into place. For other solid retailers, this year's November and December shopping mania could confirm these outfits are as strong as investors already think they are.
Take a closer look at these eight retail stocks to buy before Black Friday. Their fortunes could improve soon after this year's shopping bonanza.
Data is as of Oct. 31, 2017. Year-to-date returns include dividends. Click on ticker-symbol links in each slide for current share prices and more.
Market value: $260.8 billion
Year-to-date return: 28.9%
It almost seems cliché to include the world's biggest retailer by revenues as one of the more promising ways to ride the holiday shopping train to profits. But for the record, a year ago, Walmart (WMT, $87.31) wouldn't have been on this list. Not only was it still reeling from several years of mismanaging its in-store experience, but it was woefully behind Amazon.com (AMZN) in terms of an e-commerce presence.
Those matters have changed, particularly when it comes to online shopping. Walmart doesn't divulge specific details, but its 60% year-over-year increase in online sales in the second quarter was driven not just by acquisitions such as online retailer Jet.com, but a healthy dose of organic growth.
Walmart's two-year, $2 billion investment in its online shopping machine couldn't have come at a better time. As big as e-commerce has become, a Deloitte survey says that this year, for the first time, Americans plan on spending more online than in stores. This matters to Walmart, as online consumers plan to spend about 70% more than those who expect to most of their shopping in brick-and-mortar stores.
Market value: $2.7 billion
Year-to-date return: -53.3%
A swelling fitness craze a few years back fueled solid growth for the athletic apparel market, and the recycled idea of celebrity-driven sales of sneakers fanned those flames. Both trends have run their course, however, putting sports-oriented retailers on the defensive. In 2016, Sports Authority closed all its stores, filed for Chapter 11 bankruptcy protection and sold its name to Dick's Sporting Goods (DKS, $24.47). Sports Chalet also closed all its stores last year, and parent Vestis Retail Group also filed for Chapter 11 protection.
Dick's Sporting Goods shares have dropped roughly 60% since late 2016, so one could imply that this headwind superficially works against the sports retailer. However, that tumble may be a case of investors throwing the baby out with the bathwater. Some investors seem to have missed that despite all the turmoil, Dick's still is growing its sales and turning a tidy profit.
The reality may become obvious in the retailer's next quarterly report, which is expected to be released in mid-November. It also may become obvious later this month when the parking lots in front of Dick's Sporting Goods are jam-packed. That reality? With fewer sporting goods and athletic apparel venues up and running, Dick's is well-positioned to pick up the business that other now-folded companies left behind.
Market value: $1.9 billion
Year-to-date return: 9%
Amazon is making life difficult for some traditional retailers, but kids clothing store chain Children's Place (PLCE, $108.80) is well-defended against the e-commerce giant for a couple of reasons.
One is that buying children's clothes can be tricky, particularly for picky parents. You simply can't feel — and even properly see — the material used in a child's pair of pants or shirt when you're browsing online.
Another is that, to the extent this shopping is done online, The Children's Place has created an experience that keeps its customers thrilled. Telsey Advisory Group's Dana Telsey explained after the company's most recent quarterly report: "It is apparent that The Children's Place continues to perform well in the competitive childrenswear market as it benefits from its inventory management, allocation and replenishment, planning and forecasting, and markdown optimization systems initiatives. As a result, The Children's Place has continued to generate average unit retail (AUR) and margin gains despite difficult traffic conditions and a promotional category."
Gymboree's (GYMB) bankruptcy filing in June and the impending closure of 350 of its stores set the table for The Children's Place to win even more business.
Market value: $4 billion
Year-to-date return: -29.2%
Much like Dick's Sporting Goods, Signet Jewelers (SIG, $65.57) has benefited from a thinning herd, outlasting competitors that shut down because of waning mall traffic and an increasing number of online alternatives. Also much like Dick's, investors so far haven't been impressed with Signet's operational performance, which included a 16% year-over-year improvement in profits in the fiscal year ended Jan. 28, 2017. SIG shares have plunged 55% over the past two years.
A wakeup call may be in the offing, however.
Signet — which holds brands including Kay Jewelers and Zales — is in the middle of a weak fiscal year that should see both revenues and earnings contract. However, analysts see a return to slight growth next year, as well as a 5% rebound in profits. And the ace up Signet's sleeve here is its value. SIG shares are priced at only 9 times analysts' earnings estimates for next year, which makes it one of the cheapest stocks in this sliver of the market.
Market value: $6.5 billion
Year-to-date return: 10.8%
Holiday retail sales have grown every year since 2009, and are expected to swell by another 3.6% to 4% this season, according to the National Retail Federation. However, a Bain & Company report examining 2016's holiday season showed an increased emphasis on discounting across the industry to lure in customers, who are increasingly savvy about hunting out the best bargains.
The value-oriented mindset has proven to be a boon for names like TJX Companies (TJX) and Ross Stores (ROST). However, Burlington Stores (BURL, $93.89) may have the most to gain by proving itself this holiday shopping season.
That might be tough for investors to digest considering Neiman Marcus is closing down about a fourth of its off-price stores, and considering Nordstrom's (JWN) Nordstrom Rack chain and Ross Stores have run into growth roadblocks likely stemming from an oversaturated discount-apparel marketplace.
Burlington is a different kind of experience, though, blending the look and feel of a traditional department store but still offering the proverbial "treasure hunt" that keeps consumers coming back. That's how the retailer is now in the midst of its fifth consecutive year of revenue and income growth — it has found a formula that works in most any environment.
Market value: $532.6 billion
Year-to-date return: 47.4%
Amazon.com (AMZN, $1,105.28) is a tough stock for any value-minded investor to own. The e-commerce giant typically trades at triple-digit price-to-earnings ratios, and it has skated by on thin margins (if not losses) for most of its life since being founded in 1994.
However, after more than 20 years of paper-thin margins, the stock itself is up nearly 74,000% from its 2007 IPO price, and is still going strong. Amazon simply doesn't trade based on the normal rules of relative value. As hedge fund manager David Einhorn recently lamented, "Our view is that just because Amazon can disrupt somebody else's profit stream, it doesn't mean that Amazon earns that profit stream. For the moment, the market doesn't agree." In other words, as the old adage goes, don't fight the tape — even if the trend isn't a logical one.
Another non-fundamental reason why 2017's last couple of months could yield more of the same for AMZN shareholders? The stock gains an average of 15% over the course of November and December. The bulk of that advance takes shape in the middle of this month, leading up to Black Friday.
Something more tangible to hold on to: Those historically thin margins have fattened over the past few years thanks to the Amazon Web Services suite of cloud products, which has pushed the company to much more significant and consistent profits.
Market value: $16.8 billion
Year-to-date return: 33.7%
Many retailers have talked about turning their businesses around, but Best Buy (BBY, $55.98) is one of the few walking the walk.
Granted, revenues have been dwindling, but profits have been edging higher. That's prompting optimism among analysts such as Loop Capital's the Anthony Chukumba, who calls Best Buy "one of the few companies that has definitively proven it cannot just survive, but thrive, in the ‘post-Amazon era' in our opinion."
The rest of the analyst community collectively agrees, modeling 16% earnings growth for 2017, and another profit expansion next year. Sales finally are ticking higher this year, too, mostly thanks to the leadership of CEO and turnaround artist Hubert Joly. Joly explained in September, "We've had four years of positive comps. Our margins have expanded. We have been, in the last five years, in the top 10 percent of the S&P 500 from a total shareholder return standpoint. Customer satisfaction is up. We're gaining share. We've become relevant again."
Investors aren't entirely convinced. While the stock has rallied since early 2016, it has slid nearly 13% since its August highs. A strong showing this shopping season should validate the retailer's successful turnaround effort and return the stock to its upward trend.
Market value: $473.5 billion
Year-to-date return: 110.6%
Black Friday is the unofficial beginning of a holiday season that's traditionally Western in nature. However, Christmas is celebrated in eastern Asia, and although it's in a slightly different way, gift-giving still is part of the experience. That bodes well for Alibaba Group (BABA, $184.89). However, what Alibaba doesn't do in holiday shopping that Amazon does, it more than makes up for it with its annual "11.11 Global Shopping Festival." Nov. 11 is Singles Day, which is the world's busiest online shopping day of the year — surpassing Black Friday's frenzy in the U.S.
The proof is in the numbers. Alibaba's revenues for the quarter ended December 2016 were 55% better than the quarter ended September, mirroring the swell of business most American retailers see this time of year.
Analysts expect significant growth going forward, too. SunTrust Robinson Humphrey analysts Youssef Squali, Naved Khan, Sagar Vachhani and Nathan Mitchell recently noted, "We remain positive on BABA considering its leadership position and outsized growth and margins in China's ecommerce market, its diversified portfolio of digital assets and current valuation… Online retail sales in China grew 35.6% in 3Q, up from 34.5% in the prior quarter, based on our analysis of the data from National Bureau of Statistics in China. We view the pick-up in online sales positively for Alibaba's GMV [gross merchandise value] growth, given the company's dominant share of ecommerce in China and the positive correlation between the two metrics."
In other words, "China's Amazon" is not only on a roll, but that roll is accelerating.
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