Whatever happened to the retail apocalypse?
For the better part of 2015, 2016, and 2017, that is all analysts, investors, and market observers could talk about. The retail apocalypse. Amazon (NASDAQ:AMZN) and other e-commerce players were taking share from traditional physical retailers, and forcing a great number of them to close their doors.
The consensus thesis was that almost all shopping would migrate online, and that as that transition played out, eventually all retail stocks would die.
That thesis was way wrong.
As it turns out, traditional physical retailers aren’t dinosaurs who were just sitting back and letting Amazon eat their lunch. Instead, while Amazon was aggressively growing market share, many of these retailers were adapting their business models to be relevant in today’s dynamic retail environment.
Retailers built out digital footprints, enhanced omni-channel capabilities, focused product offerings, slimmed the real estate portfolio, remodeled stores, and much more.
The sum of these actions did two things. One, it reinvigorated foot traffic trends across America, and physical stores became relevant again. Two, it allowed traditional retailers to reap the rewards of secular growth in e-commerce.
Net result? Retail stocks have flown higher over the past year. This rally is far from over. Many retailers reported their best numbers in a decade this summer. Usually, big summer spending leads into big holiday spending.
That trend should remain true this time around, as consumer confidence is sky-high, the economy is healthy, and the savings rate is still fairly high. Thus, this holiday season promises to be a huge catalyst for already resurgent retail stocks.
With that in mind, here’s a list of five of retail stocks which investors should consider adding to their portfolio for an end-of-year boost.
Retail Stocks to Buy for the Holidays: Macy’s (M)
Leading the retail resurgence for most of 2018 was mall stalwart Macy’s (NYSE:M). Macy’s stock had more than doubled from under $20 to over $40 in less than a year due to improved operational results. But, Macy’s stock hit a speed bump recently with second quarter earnings which disappointed investors. Macy’s stock dropped.
This is a dip worth buying.
Second quarter numbers weren’t all that bad. Comparable sales rose 0.5%, and 2.3% if you balance out results for certain one-offs. Gross and operating margins improved. Adjusted profits rose more than 60% year-over-year.
Those are really good numbers. They just weren’t good enough to justify Macy’s stock at $40. After all, the stock had more than doubled in less than a year. The valuation had climbed to multi-year highs. And, the stock was trading more than 50% above its 200-day moving average, which is a decade-high divergence.
In other words, Macy’s stock needed to cool off.
It has cooled off. Now, it is time to buy the dip. The holiday season promises to big, as Macy’s is a mall stalwart and usually wins big when holiday shopping is strong (see last year).
Plus, the company just hired 80,000 seasonal workers, and said that they anticipate a strong and successful holiday season. The valuation has also normalized to historically normal levels, and the stock is only 15% above its 200-day.
The mechanics of this stock look good, the fundamentals are strong, and the valuation is reasonable. That is a recipe for a nice bounce-back into the end of the year.
Retail Stocks to Buy for the Holidays: Five Below (FIVE)
Macy’s stock more than doubled in less than a year during the retail resurgence. But, that is nothing compared to off-price retailer Five Below (NASDAQ:FIVE). Since the start of 2017, FIVE stock has more than tripled from $40 to $130.
Why has FIVE stock been such a huge winner? Because Five Below has found a winning recipe in the retail segment.
Five Below is a discount retailer that sells things at $5 or less. But, more importantly, they are a trend-oriented discount retailer with a quickly changing and always dynamic product assortment.
For example, when fidget spinners were the craze, Five Below featured a ton of $5 and under fidget spinners at the front of its store, and sold a whole bunch of them. Same with selfie sticks, and other recent hot trends.
This has been a winning recipe in retail. Over the past several years, Five Below has posted consistently positive and often huge comparable sales growth. Meanwhile margins have consistently trended higher, too. Plus, the company has a relatively small real estate footprint (only 700 stores), and management thinks that base can grow to 2,500 or more in the U.S. alone.
A powerful unit growth trajectory coupled with a successful retail strategy has made FIVE stock a shining star. This will continue for the foreseeable future. If the holiday season is a blowout one, it will certainly boost Five Below’s numbers. Those strong numbers will keep FIVE stock on its upward trajectory for at least the next several months.
Retail Stocks to Buy for the Holidays: Skechers (SKX)
Every once in a while, Skechers (NYSE:SKX) stock gets really cheap. Almost always, that is a good time to buy the stock as it proceeds to bounce back over the subsequent several months.
I think we have that same set-up here ahead of what will be a strong holiday season.
In late July, SKX stock dropped big after reporting weaker than expected comparable sales growth and profits in Q2, while delivering a sub-par guide for Q3. SKX stock fell from $33 to $26. But, the results weren’t that bad. Sales growth was 10% and comparable sales growth was 4.5%. The international business remained red-hot with 25% growth. Gross margins expanded nearly 200 basis points.
Overall, the quarter wasn’t awful. As such, SKX stock bounced back from the sell-off. It went from $26 to $30 in a hurry.
Now, SKX stock is selling off again with no apparent catalyst outside of investors taking a gloomy outlook on Q2 numbers. Again, this is a dip worth buying. Just look at the chart of SKX stock. It is very volatile. Big dips should be bought. Big rallies should be faded.
Plus, SKX stock is trading at just 15X forward earnings. Peers Nike (NYSE:NKE) and Under Armour (NYSE:UAA) trade at 30X and 120X forward earnings, respectively. Yet, Skechers has consistently been a bigger revenue grower than both Nike and Under Armour. That is a disconnect I don’t believe can persist forever, and all this stock needs for a heroic rebound is a catalyst.
Strong Q3 and Q4 numbers due to robust consumer strength? Seems like a good catalyst to me. As such, I think SKX stock finishes the year with a bang.
Retail Stocks to Buy for the Holidays: Express (EXPR)
Holiday 2017 was especially friendly to beaten-up mall retailer Express (NYSE:EXPR). In about two months from October to December 2017, EXPR stock nearly doubled from $6 to almost $12 on improved sentiment across all of retail.
That rally didn’t hold. EXPR stock collapsed back to $6 by early February 2018 as holiday numbers came in lighter than expected. But, EXPR stock has since reported consistently solid numbers, and the stock has rebounded back to double-digit levels.
While I don’t think EXPR stock can double in two months again this holiday season, I do think this stock can head significantly higher into the end of the year.
The numbers have been really good this year. Comparable sales growth has been positive in back-to-back quarters, including a fairly healthy 1% gain last quarter. The e-commerce business is red-hot, growing at a 37% and accelerating rate. Gross margins are up. The SG&A rate is flat. Profits are up a whole bunch.
In other words, Express has really strong operational momentum right now. So does EXPR stock, which is up more than 50% since February. If the holiday season is as strong as I expect it to be, this momentum in operations and the stock should persist into the end of the year.
Will it double in two months? Probably not. But I easily see another 20% upside if the company capitalizes on strong holiday shopping trends.
Retail Stocks to Buy for the Holidays: Urban Outfitters (URBN)
Relative to its mall-based peers, Urban Outfitters (NASDAQ:URBN) has actually been one of the shining stars in retail. Over the past year, URBN stock has essentially doubled from $22 to $44 due to improved operational results.
Over at Urban, the story is characterized by three things: positive comparable sales growth, gross margin expansion, and opex leverage. All three of those things are good.
They all help spark profit growth. Indeed, that is exactly what is happening at Urban Outfitters. Last quarter, comparable sales rose 13%, gross margins expanded by 180 basis points, the opex rate fell more than 130 basis points, and profits almost doubled year-over-year.
Those are huge growth numbers. And, the growth is widespread. Urban Outfitters is the parent company behind three stores (Urban Outfitters, Anthropologie, and Free People). All three stores reported double-digit comparable sales growth last quarter.
Much like Express, Urban Outfitters should be able to sustain this operational momentum into the holiday season. This is a mall-based retailer with a ton of exposure to the consumer in both the physical and digital channels. Plus, the company’s product assortment is clearly resonating well with consumers.
Thus, if consumers decide to open their wallets en masse this holiday season, a lot of those dollars will get allocated to Urban Outfitters.
As such, I expect a very strong holiday season for this retailer. Strong holiday numbers should allow the current rally in URBN stock to persist into the end of the year.
As of this writing, Luke Lango was long AMZN, M, SKX, EXPR, and URBN.