Many retail stocks have delivered a disappointing year or so of results despite the fact that consumer discretionary stocks on the whole gained 9% in 2015.
When it comes to what’s in store for retail stocks in 2016 … there’s little to cheer about. At least so far.
Prices are down, which are propping yields up. But while that’s tempting some to go shopping for value, remember: Not every retail stock yielding 3% or more is worth owning. Some are in the dust bin for a reason, and others have a better than 50/50 chance of bankruptcy in the not-too-distant future.
Don’t get caught in a value trap.
While there are retail stocks worth a gamble at the moment, you do have to be patient because the volatility that we’ve experienced in the first two weeks of the year is expected to continue for some time given China’s continuing slowdown.
“There has been ongoing fear bubbling since August that the China slowdown is worse than expected,” said James Rossiter, senior global strategist at TD Securities. “Investors are nervous that we’ll see a massive downside correction in China’s economy.”
If the correction materializes, all bets are off. But assuming this worst-case scenario doesn’t come into play, investors would do well targeting these three retail stocks yielding 3% or more.
Retail Stocks for the Dividends: Buckle Inc (BKE)
Dividend Yield: 3.6%
It’s always darkest before the dawn, goes the old saying, and nowhere is this more evident than the current retail environment in which Buckle (NYSE:BKE) finds itself.
The Buckle was once considered a darling among retail stocks because of its comps growth in combination with an annual special dividend that gave BKE stock an added lift. While the special dividend is still very much a part of its business identity, the same-store sales have been on a steady decline for some time now.
As a result, over the past 12 months, Buckle has lost more than 40% of its value compared to 3.6% for the S&P 500 and the same 3.6% for its apparel store peers. On an annualized basis, Buckle’s three- and five-year returns have been shy of BKE’s peers by 16 and 10 percentage points, respectively. seen BKE stock underperform its peers by 16% and 10% respectively. Ouch!
Buckle’s comps year-over-year for the all-important months of November and December averaged a 6.7% decline, with its women’s business performing exceptionally poorly. And considering that the women’s business accounted for 48% of its overall monthly sales in the final month of 2015, it’s no wonder investors have been bailing.
However …
Last February, InvestorPlace contributor Lawrence Meyers suggested BKE was ripe for a buyout. One year later, I don’t think anything has changed.
Chairman Daniel Hirschfeld and CEO Dennis Nelson together own slightly less than 40% of the company. Any deal will have to be approved by the duo in order to have any chance of success, meaning only friendly buyers (think Warren Buffett) need apply. However, Nelson is 65 and Hirschfeld 73, suggesting there might not be a better time to transition the company’s ownership.
Moreover, during the past decade, Buckle’s net margin has never been less than 10%; today it sits above 13%. With absolutely no debt and almost $200 million in cash and investments, Buckle can endure a long dry spell when it comes to declining monthly comps.
Retail Stocks for the Dividends: American Eagle Outfitters (AEO)
Dividend Yield: 3.4%
American Eagle Outfitters (NYSE:AEO), down 6% year-to-date, has three things that sets it apart from its two teen competitors — Abercrombie & Fitch (NYSE:ANF) and to a much lesser extent, Aeropostale (NYSE:ARO) — that will see it regain its prominent position in retail once more:
First, it announced in early December the appointment of Jay Schottenstein as CEO. Schottenstein — one of the retailer’s largest shareholders and chairman of the board since 1992 — understands retail inside and out, performing an excellent job in his capacity as interim CEO over the past 24 months. The company couldn’t be in better hands.
Second, AEO’s Aerie brand — which is all about bras, panties and sleepwear — might be small in stature compared to its namesake, but with same-store sales for the first nine months of 2015 up 17% year-over-year and plenty of room for expansion, AEO stock is bound to benefit in the coming quarters as it ramps up growth.
Lastly, speaking of growth, AEO recently (November 2015) acquired Tailgate Clothing Company, which owns and operates Tailgate, a vintage, sports-inspired apparel brand with a college town store concept, and Todd Snyder New York, a premium menswear brand. Tailgate fits right into the American Eagle Outfitters brand and Todd Snyder could easily takeout both Banana Republic and J. Crew. It’s a very exciting addition to complement Aerie on the women’s side.
Retail Stocks for the Dividends: Nordstrom, Inc. (JWN)
Dividend Yield: 3.1%
In the third position, I won’t spend a lot of time elaborating on why I like Nordstrom (JWN).
Despite the fact many believe that department stores face too many challenges to their business models to make any headway in the very competitive world of retail, I see its moves to invade both Canada and New York City ultimately paying big dividends on the significant sums invested in both markets.
Trading near a 52-week low, I see good things ahead for JWN despite the headwinds it currently faces.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
