It finally happened. After several years of shrinking sales and running up huge losses against a debt-burdened balance sheet, Sears (NASDAQ:SHLD) finally filed for bankruptcy in mid-October 2018.
That’s a big deal. Although we all saw this ending coming, it is nonetheless sad to say goodbye to a retailer that forever changed America. Once upon a time, Sears helped America become a healthy economy again in the post-War years. The company was a pioneer for massive mall expansion, and re-shaped retail to what it was before the internet came along. And, during all this, Sears became one of the biggest and most powerful retailers in the world.
Back then, no one would’ve guessed that Sears would file for bankruptcy before 2020. But, here we are, and Sears is filing for bankruptcy. It makes you wonder. Who could be next? Are my retail stocks really all that safe?
To be clear, Sears was a unique situation. The company was mismanaged. There were some critical operational missteps. There was a ton of debt on the balance sheet. Most importantly, the company didn’t change with the environment. Instead, management fought a secular trend in e-commerce that never stopped or slowed. They ultimately lost that fight.
Not all retail stocks are like Sears. Some have similarities. But, some are way different and promise to be big winners several years down the road.
Who are the big winners? Let’s take a closer look at five big-promise retail stocks that aren’t anything like Sears, and have robust long-term staying power and growth potential.
When Amazon (NASDAQ:AMZN) pioneered e-commerce as a mass-market activity earlier in the decade, that was when the struggles at Sears really started. E-commerce came in; Sears didn’t adapt and e-commerce took over. New retail giants like Amazon made consumers forget all about the brick-and-mortar dinosaurs like Sears.
The reason to buy Amazon stock today is because this transition to e-commerce is still in its early stages. By all logic checks, e-commerce is a better way to shop than in store. You can more easily find products through digital indexing. Convenience is higher because you can shop from anywhere, and can get things delivered in a hurry. Plus, on a place like Amazon, you have all-in-one convenience and super low prices.
Altogether, digital shopping is simply more efficient than physical shopping. Yet, e-commerce represents only 10% of total retail sales in the U.S., and presumably less on a global scale. Thus, there is still a long runway ahead for e-commerce to grow by leaps and bounds to 20%, 30% and potentially even 40% or more of total retail sales. As this transition plays out, Amazon stock will consistently trend higher.
Amazon stock is going through some tough times right now. Elevated interest rate risks are diluting the company’s valuation. But, Amazon stock seems to have found some support in the $1,700’s, and if this stabilization persists, this dip will turn into a golden buying opportunity with a big rally on the other end. As such, I think now is a perfect time to start considering buying the dip in Amazon stock.
Earlier in the decade, many feared that Walmart (NYSE:WMT) would follow in the footsteps of Sears and fall victim to the “Amazonification” of retail. That didn’t happen. Unlike Sears, Walmart adapted to the era of e-commerce. As a result, Walmart succeeded where Sears failed, and Walmart stock has actually perked up to all-time highs recently.
The reason to buy Walmart stock for the long-term is that the company has proven a unique ability to adapt to rapidly changing circumstances while maintaining its emphasis on low prices and high convenience. This ability is very important. E-commerce wasn’t the first major change to happen in retail. It won’t be the last. But, if track record stands for anything, Walmart will be able to survive any and all mass retail changes.
Why? Because at the end of the day, two things matter most in retail — price and convenience — and Walmart dominates on both. They have low prices, and they always try to offer the most convenience. When Amazon changed the whole retail game and took prices to new lows while taking convenience to new highs, Walmart didn’t sit idly back and wonder when customers would come back to their stores. Instead, they built out a robust e-commerce business, lowered prices to match Amazon, developed multiple omnichannel commerce capabilities and expanded product assortment to groceries to further enhance the convenience value prop.
Altogether, Walmart got better because of bigger competition. That is a positive sign for this company long-term. Right now, it is safe to say that Walmart’s big e-commerce transition is still in its early stages. This transition has been largely successful thus far, and as a result, Walmart stock has been a winner. Thus, so long as this transition continues to be successful, Walmart stock should continue to be a winner.
For all intents and purposes, Costco (NASDAQ:COST) is the brick-and-mortar version of Amazon. Both companies employ a membership retail business model that allows them to price items at-cost because all profits are generated from membership revenues. Also, both companies are complete one-stop shops, offering everything from clothes to snacks to furniture.
Surprisingly, being the brick-and-mortar Amazon has actually prevented Costco from being Amazoned. Costco has a massive and sticky membership base. Thus, its customers don’t just leave on a dime. They understand the value prop of Costco as a low-cost, high-convenience retailer. That value prop, while challenged by Amazon, hasn’t been eroded all that much, mostly because Costco has a wider selection than Amazon that includes fresh foods, gas and a food court.
So long as Costco can maintain its sticky user base and be fundamentally different than Amazon, Costco stock will be a winner. The one big risk here is Amazon’s offline retail expansion. But, the Whole Foods acquisition was supposed to inflict serious damage, and it didn’t. Therefore, Amazon’s best effort to steal share away from Costco didn’t work, and it doesn’t look like Amazon has any offline plans in the foreseeable future that threaten Costco.
Costco stock has been a pretty consistent winner over the past decade, with some turbulence due to the valuation becoming over-extended. I think we are entering one of those turbulent periods right now. The valuation on Costco stock has surged to historically unsustainable levels, and the stock is normalizing down. I think this normalization will last a bit longer, but also believe that any and all big dips in this stock are long-term opportunities. Thus, now could be a good time to start thinking about buying the dip.
Home Depot (HD)
Much like the other retail stocks on this list, Home Depot (NYSE:HD) has been a retail survivor. While Amazon changed the whole retail game and forced many retailers into bankruptcy, one sector it didn’t alter all that much was the home improvement sector. After all, it is somewhat tough to be a digital retailer and alter a sector that relies on a physical shopping experience (home improvement shopping is a touch-and-feel experience that most often requires expert advice).
Home Depot is king in the home improvement sector. Thus, as the home improvement sector has excelled despite Amazon encroachment, Home Depot stock has been a big winner. Over the past five years, this stock has gone from $75 to $200.
This strong performance will persist. There aren’t any technological advancements on the horizon which promise to change the touch-and-feel dynamic of home improvement shopping. Thus, Home Depot should remain king of this space for a lot longer. Plus, the company is building out its moat through home improvement services, like floor removal and installation. Overall, this company’s numbers should remain healthy in a long-term window.
That being said, the housing market is showing signs of slowing, and that isn’t a great thing for Home Depot stock. When the housing market slows, you have less home improvement demand. Home Depot’s numbers drop, and Home Depot stock sinks. As such, near-term risks are high for this stock. Nonetheless, big dips should be seen as a long-term opportunities, so once investors get confirmation that the housing market starts picking up again, Home Depot stock will become a buy.
Dick’s Sporting Goods (DKS)
This pick may come as a surprise to some investors. The four previous stocks on this list are either Amazon or companies that have been resilient to the Amazon onslaught. Dick’s Sporting Goods (NYSE:DKS) doesn’t fall into either of those categories. Instead, this is a company that has very much been adversely impacted by digital shopping trends, with a stock that has dropped in a big way over the past five years.
But, you don’t buy DKS stock because of what has happened. You buy it because of what will happen. And, what will happen is a big rebound due to e-retail encroachment forcing huge consolidation in the sporting good sector, similar to what happened at Best Buy (NYSE:BBY) when e-retail forced consolidation in the consumer electronics space.
Indeed, the parallels between Best Buy and Dick’s are strong. A few years back, Best Buy was struggling as e-retail was killing the entire consumer electronics space. All of Best Buy’s peers went under. But, that left Best Buy as the last man standing in what was still a pretty big and valuable space. Best Buy proceeded to gobble up all that up-for-grabs market share, the numbers dramatically improved, and Best Buy stock took off like a rocket ship.
Same thing will happen with DKS stock. Dick’s has struggled as e-retail has killed the entire sporting goods space. Essentially all of Dick’s peers have gone under. Now, Dick’s is the last man standing in what is still a pretty big and valuable space. Dick’s will proceed to gobble up all that up-for-grabs market share, the numbers will dramatically improve, and DKS stock will take off like a rocket ship.
As of this writing, Luke Lango was long AMZN, WMT and DKS.