The brilliant, well-paid minds at Morgan Stanley (NYSE:MS) want you to know that investing in retail stocks is a mug’s game because if you take Amazon.com, Inc. (NASDAQ:AMZN) out of the equation, retail’s strong performance in 2018 isn’t nearly as impressive.
First, before I get into the seven retail stocks to own, let me state that I don’t know for certain which exchange-traded fund index Business Insider is referring to in its April 24 article discussing the investment bank’s negative view on brick-and-mortar retail because I refuse to pay to go beyond the paywall.
However, the SPDR S&P Retail ETF (NYSEARCA:XRT), the largest retail ETF available that isn’t online-focused exclusively, is equal-weighted. Therefore, the logical choice is the VanEck Vectors Retail ETF (NYSEARCA:RTH), which tracks the performance of the MVIS US Listed Retail 25 Index. Amazon is its top holding with a weighting of 20.2%, almost double Home Depot Inc (NYSE:HD), the ETF’s next largest weighting at 11.3%.
Yes, if you look at retail stocks in the context of this ETF or index, it’s easy to come up with this conclusion, but that does a big disservice to many of the excellent retailers doing business in America today.
To prove my point, I’m going to recommend seven retail stocks in seven different sub-categories of retail.
I think you’ll find over the long haul all of these stocks will deliver the goods.
Retail Stocks to Own: Williams-Sonoma (WSM)
“Laura Alber spent 10 years at Williams-Sonoma (WSM) in various positions before replacing company veteran Howard Lester as CEO in May 2010,” I wrote June 11, 2014. “Since she took charge, WSM stock hasn’t had a single year of negative returns.”
As is often the case when writing good things about a stock, it goes the other way. WSM stock proceeded to deliver negative returns in both 2015 and 2016.
Not to be deterred, I doubled down in 2016, calling Williams-Sonoma one of the best retail stocks in America.
“Will WSM stock keep dropping? Probably. But, market timing is for fools. Williams-Sonoma, in my opinion, is one of the best stocks in retail, if not the best, specifically, because it is the poster child for omnichannel retail,” I wrote on June 21, 2016. “If you believe omnichannel retail is the way, you must own WSM — warts and all.”
It’s up 30% since then, and if its strong first-quarter earnings are any indication, it’s only getting started.
Retail Stocks to Own: Urban Outfitters (URBN)
If you’re investing in retail stocks for the long haul, the first thing you need to do is manage your expectations. Consumers are very fickle when it comes to fashion, so companies like Urban Outfitters, Inc. (NASDAQ:URBN) aren’t always going to be delivering strong, quality same-store sales growth.
There are going to be fashion misses and poor product selection from time to time. It’s the nature of the beast.
URBN stock is only recently awakening from its slumber. Up 149% in the past 52 weeks, the specialty retailer has sprung to life.
In the first quarter ended April 30, its three main concepts — Urban Outfitters, Anthropologie and Free People — saw same-store sales grow 8%, 10% and 15% respectively.
Interestingly, the company’s wholesale business, which accounts for less than 10% of its overall revenue, is also coming to life, growing by 13.1% to $80.1 million.
Why does that even matter given it’s such a small piece of the company’s overall business? Because although it generates less than 10% of revenue, it accounted for 23% of the company’s operating profit in 2017. Every little bit counts.
Also, nice to see, the company’s digital business now accounts for over half its overall revenue compared to less than 25% just three years ago.
If you want to provide an omnichannel shopping experience, your online business has to be growing — and it is.
Retail Stocks to Own: Burlington Stores (BURL)
Five years ago, you could have bought Burlington Stores Inc (NYSE:BURL) for less than $30; today, it’s trading at more than five times that price.
It doesn’t hurt that Burlington competes in the highly lucrative off-price retail category, which has delivered excellent returns in recent years for most participants.
On May 31, it reported Q1 2018 earnings that were above guidance, with same-store sales growth of 4.8% on the top line along with a 58% increase in adjusted EPS on the bottom line.
Not only did it deliver good results in the quarter, but it also upped its full-year adjusted EPS for 2018 to $5.95 a share at the mid-point, 17 cents higher than previously forecasted.
In 2018, Burlington expects to open as many as 40 stores at the cost of about $6.25 million per location. Like most businesses which generate most, if not all, of their revenue in the U.S., it will benefit from a lower effective tax rate in 2018 — 22.5% at the midpoint versus 35.2% just two years earlier.
Until shoppers stop looking for deals, which is hard to imagine, Burlington Stores stock will continue to move higher.
Retail Stocks to Own: Lowe’s (LOW)
There’s a good news, bad news story surrounding Lowe’s Companies, Inc. (NYSE:LOW) at the moment.
The good news is that former J.C. Penney Company Inc (NYSE:JCP) CEO Marvin Ellison is joining the home-improvement retailer in early July after about three years in the top job at the department store. Ellison worked at rival Home Depot for 12 years before joining the department store in 2014.
The bad news is that Bill Ackman has recently initiated a $1 billion investment in Lowe’s — the same Bill Ackman who lost a lot of money betting on Ron Johnson reviving JCP.
Personally, I think Ellison’s three years at JCP was a dress rehearsal for the job he’s about to undertake. It won’t be an easy task, beating his former company — especially when activist investors including Ackman are pressing for faster change at the North Carolina home-improvement retailer.
While he’ll have his work cut out for him, Ellison has the advantage of knowing HD inside and out, making some of the moves necessary to catch Big Orange much easier to implement.
Anyone who bought LOW shares in the low $80’s in April is wise not to take profits. I believe Ellison proved enough at JCP to be able to turn up the heat on Home Depot over the next 12-18 months.
Retail Stocks to Own: Five Below (FIVE)
Although its business caters to teens and pre-teens, selling lots of stuff that kids want at $5 or less, it also goes after their parents, providing a potent combination for growth.
However, if you look at where its 625 stores are located, you’ll notice that it doesn’t have any stores in 18 states, including a few with a decent amount of people like Washington State and Colorado. In fact, it only entered California in 2017 and already has more than 103 stores.
Five Below is a growth machine — plus it makes a lot of money.
The typical store is 8,000 square feet, requires a reasonable $300,000 investment, generates $2.1 million in first-year sales, and averages an annual $300,000 to $450,000 four-wall EBITDA contribution for a 100% to 150% return on investment.
I don’t think I need to remind you how popular dollar stores are these days. Well, imagine one that caters to kids, and is highly profitable and you get Five Below.
Of all of the retail stocks mentioned in this article, FIVE is easily in the top three to own forever.
Retail Stocks to Own: Duluth Holdings (DLTH)
Those are good returns, no doubt. However, it’s possible that the best is yet to come. Here’s why.
Duluth Trading is run by a former senior executive of Lands’ End, Inc. (NASDAQ:LE). Stephanie Pugliese is delivering a lifestyle brand and retail experience that Lands End once was and is looking to become again.
Pugliese didn’t start the company — Executive Chairman Stephen Schlecht did — but she has been with the company since 2008 after leaving Lands End and understands what Duluth Trading is all about.
On June 5, it delivered solid first-quarter earnings, which included a 33rd consecutive quarter of higher year-over-year net sales.
Started as a mail order catalog in 1993, Duluth now has 37 stores with 15 more coming online in 2018.
It is not yet a big moneymaker as it gets its omnichannel business just right, but I see lots of profit potential in the future.
Retail Stocks to Own: Best Buy (BBY)
It’s hard to believe in an age where Amazon is supposedly eating every retailer’s lunch that Best Buy Co Inc (NYSE:BBY) stock would be trading within 11% of its all-time high of $79.90, but that’s precisely where the electronics retailer sits.
CEO Hubert Joly, who joined the company in 2012, quickly went to work reviving its business. Skeptics felt that the former hospitality executive’s resume was unimpressive. I completely disagreed and said so in 2013.
“I credit Best Buy’s board for recognizing they needed to hire someone a year ago who had turnaround experience, understood people and was local to the Minneapolis area and could get started right away,” I wrote on Aug. 20, 2013. “Is Best Buy back? Not all the way, but far enough along to know it’s on the right side of its turnaround.”
BBY stock is up over 300% since Joly was hired by the board in August 2012. If that doesn’t seem like a big deal, it’s important to remember that most experts thought Best Buy was ready to collapse due to consumers opting to buy online, making its big-box stores obsolete.
In late May it released first-quarter earnings that included same-store sales growth of 7.1%. Although its results were excellent, investors felt it should have upped its guidance for the rest of the year. It didn’t, sending BBY for a 10% drop in its share price.
If there’s such a thing as buying on the dip, Best Buy is the stock to do it with.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.