Many retail stocks have gotten crushed by a lethal combination of disappointing earnings and lackluster guidance. However, there are some gems in the bunch that are doing well despite many economists expecting the worst holiday sales in years.
Of course, the macroeconomic environment remains challenging for all retailers, so it pays for investors to be selective. Many chains are growing increasingly concerned that consumers are increasingly expecting deals and will only respond to “once-in-a-lifetime offers” that crush companies’ profit margins. But there’s more to it than that.
Some retailers are facing some company-specific issues. Walmart (WMT), the largest retailer, has faced withering criticism for lacking enough workers to keep its store shelves stocked. An ill-advised expansion into Canada is hurting No. 2 retailer Target (TGT) while shoppers have fled Kohl’s ever since the chain began shifting away from national brands.
But the following stocks are best-of-breed performers that know how to navigate a tough consumer market.
#1 – TJX (TJX)
YTD gain: 46%
52-week price target: $66.26 (6% potential upside)
Amazingly, earnings at TJX (TJX) — the parent of TJ Maxx, HomeGoods and Marshall’s — have grown for more than two years, even though the chain appeals to the same budget-conscious customers that seem to be avoiding Walmart and other discount retail stocks.
During the most recent quarter, same-store sales at TJX rose 5%, beating the company’s internal expectations of about 4%. HomeGoods alone reported a 10% gain in that key retail metric.
During the company’s recent earnings conference call, CEO Carol Meyrowitz struck a positive note, adding that TJX is “confident that we will become a substantially bigger company, driving both the top and bottom line. ”
#2 – Ralph Lauren (RL)
Average 52-week price target: $195.60 (12% potential upside)
For a company that’s in the midst of a management change, Ralph Lauren (RL) doesn’t seem to be missing a beat.
Sure, net income in the latest quarter fell 4.2% to $205 million, or $2.23 per share. That’s down from $214 million, or $2.29 per share, a year earlier, as higher costs overshadowed gains in sales. But earnings came in better than the $2.20 per share analysts had expected, and revenue rose 2.8% to $1.92 billion. Ralph Lauren, whose brands include Polo, Club Monaco and Rugby, also hiked its dividend 13% to 45 cents.
“The diversity of the Ralph Lauren portfolio, the strength of our lifestyle positioning and our increasingly global reach are enviable assets that position us for strong long-term growth,” Jackwyn L. Nemerov, the company’s president, said during the recent earnings conference call. And that’s what makes this one of the strongest retail stocks out there.
#3 – Macy’s (M)
Average 52-week price target: $54.44 (4.5% upside)
Macy’s (M) CEO Terry Lundgren may be the industry’s savviest leader.
Not only did M report better-than-expected quarterly earnings, but unlike many retailers, it had positive things to say about the holiday season, proclaiming the company was “entering the fourth quarter with confidence.”
There are many reasons for Lundgren’s success, including decision to better match goods to the local tastes of its 800 Macy’s stores and 36 Bloomingdale’s stores in 10 states. Lundgren also is ratcheting up the company’s ecommerce business, which should help it compete against online retail stocks.
#4 – Gap (GPS)
Average 52-week price target: $46.22 (13%)
A lot of things have gone right for Gap (GPS) CEO Glenn Murphy.
Customers seem to like the fashions sold by the Gap and appreciate the value they get at Old Navy. The San Francisco-based recently posted a 43% gain in profit, along with a 2% jump in same store sales. That’s significantly better than the figures being put out by other retail stocks.
And that success hasn’t gone unnoticed by analysts. “Of all the apparel retailers, Gap is still better positioned to gain share,” said Poonam Goyal, a retail analyst for Bloomberg Industries.
#5 – L Brands (LB)
Average 52-week price target: $63.92 (1% upside)
Does Victoria have more secrets to share with investors?
L Brands (LB), the parent company of the iconic lingerie brand sure thinks so. Comparable store sales at Victoria’s Secret rose 4% in the most recent quarter, fueled by double-digit gains in bras, panties and fragrances.
But don’t think it’s just lingerie holding up LB stock — the rest of the company is also doing well. Gains at Bath & Body Works pushed overall same store sales up 3% in the most recent quarter.
All of these retail stocks are worth adding to your portfolios. But if you’re a selective investor, the ones with the biggest potential upside are Gap and Ralph Lauren.
As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.