In the retail world an increasingly large divergence has emerged separating retail winners and retail losers. Long story short, Amazon (NASDAQ:AMZN) and e-commerce disrupted the entire traditional retail landscape. Some retailers adapted successfully to this disruption — those retailers became big-time winners. Some didn’t — those retailers became big-time losers.
The numbers speak for themselves here. The SPDR S&P Retail ETF (NYSEARCA:XRT) is essentially flat year-to-date. But, that flatness is the result of three things. One, there are a ton of retail stocks that are down more than 20% in 2019. Two, there are a few retail stocks up more than 20% in 2019. Three, those few big-time winners are offsetting those many big-time losers, and the retail sector has netted out a flat gain this year.
In this article, we will focus on the winning group — the group of retail winners that have successfully adapted to e-commerce disruption, are reporting very strong numbers, have had soaring stocks in 2019 and which appear positioned for long-term success.
After all, as a study from professor Hendrik Bessembinder from Arizona State University finds, most of the gains in the stock market have historically been produced by a few big winners. The same is true today in the retail sector — all of the gains come from a few strong retail stocks. Sticking with those retail winners in the long run seems to be the smart investment strategy.
Without further ado, then, let’s take a look at five red hot retail stocks to buy for the long haul.
Red-Hot Retail Stocks to Buy: Walmart (WMT)
Year-to-Date Gain: 26%
Global retail behemoth Walmart (NYSE:WMT) was supposed to be the company that was most susceptible to Amazon’s disruption in the retail world. After all, Amazon was supposed to become the new Walmart, and Walmart was supposed to become increasingly less relevant.
For a period of time, this did happen. Back in 2015 and 2016, Amazon was kicking Walmart’s butt. Walmart was slow to adapt. The latter lost traffic, comps struggled, margins came under pressure and WMT stock dropped big.
But, since then, Walmart has done everything right to fight back against broad e-commerce disruption. They put all their resources into building a robust digital business that rivaled Amazon in terms of scale and convenience. They also leveraged their huge physical store footprint to incorporate multiple omni-channel commerce capabilities, including things like “buy online, pick up in store”. The company refreshed stores to be more technology-focused and relevant, expanded the product assortment to boost the all-in-one value prop and has jumped into the India e-commerce market with Flipkart.
Net net, over the past few years, Walmart has gone from old fashioned retailer, to next-generation retailer. Today, Walmart is consequently firing off its best comparable sales and traffic numbers in a decade. WMT stock has responded well. YTD, shares are up more than 25%. Over the past three years, they are up nearly 70%.
YTD Gain: 63%
Another company that was supposed to be hurt big by Amazon encroachment — and was hurt big for a while — is U.S. general merchandise retailer Target (NYSE:TGT).
For Target, the story sounds very similar to the Walmart story. Back in 2015 and 2016, Amazon was kicking Target’s butt, because Amazon was beating Target at the two things that Target was known for — low prices and high convenience. During this stretch, Target’s comparable sales growth flipped into negative territory, margins got hit hard, and the stock dropped sharply.
In 2017, Walmart started successfully fighting back against Amazon. Target didn’t. That put additional pressure on shares. The implication was that, while Walmart may have figured out how to compete with Amazon, Target was still struggling to find its way.
As it turns out, though, it was only a matter of time before Target did find its way. By 2018, Target had figured things out. They built out the digital business, expanded their omni-channel capabilities, increased their product assortment, and refreshed stores. In so doing, much like Walmart, they transformed from an old-fashioned retailer, to a next generation retailer. Now, Target is firing off decade-best comparable sales and traffic numbers, has consistently out-comped Walmart over the past few quarters and has the fastest-growing digital commerce business among itself, Walmart and Amazon.
Those are impressive feats. As such, it should be no surprise that TGT stock has been on fire in 2019. Year-to-date, shares are up more than 60%.
YTD Gain: 58%
Athletic apparel brand Lululemon (NASDAQ:LULU) has been on fire for several years amid retail market choppiness for three big reasons.
First, the athleisure market is on fire. Thanks to the rise of social media and photo-first sharing apps, consumers today are more concerned than ever with looking their best and leading healthy, fit and active lifestyles. A major part of this secular trend is looking the part, which means buying gym clothes as opposed to street clothes, and wearing those gym clothes everywhere. This has created a rising tide throughout the entire athletic apparel market.
Second, in that red-hot athleisure market, Lululmeon stands out as one of the most valuable brands. The company started out by making yoga apparel for women. They were really good at doing that, and quickly established a reputation for making the highest-quality yoga apparel. Lululemon has largely maintained this reputation ever since, and as such, has become the de-facto high-quality yoga apparel supplier in the athleisure market — a position that has ultimately resulted in strong demand and margins.
Third, Lululemon has been able to leverage this high-quality reputation to successfully branch out into other verticals. Over the past few years, Lululemon has been transforming from a yoga apparel brand, to a full athletic apparel brand, with products that cover the whole athletic apparel spectrum. Most of these new products have been well received, because the products are consistently of high quality.
Big picture — Lululemon is a winning brand in one of the retail market’s hottest segments. As such, LULU stock is up nearly 60% year-to-date, and more than 230% over the past three years.
YTD Gain: 40%
Chinese e-retail giant JD.Com (NASDAQ:JD) has had its fair share of problems over the past few years. But, the company has bounced back in a big way in 2019, and — importantly — this newfound strength appears to have longevity.
JD is the second-largest e-retail platform in China, behind only Alibaba (NYSE:BABA). As the second-largest e-retail platform in China, JD goes as China’s digital economy goes. China’s digital economy slowed meaningfully in 2018, and as such, JD’s growth rates tumbled. As those growth rates tumbled, so did JD stock.
But, in 2019, China’s digital economy has found its footing again. As it has, JD’s growth rates have stabilized, and JD stock has bounced back. Importantly, the fundamentals imply that this newfound strength should persist. That is, China’s digital economy remains significantly under-penetrated relative to other digital economies, with China’s internet penetration rate hovering around 60%, versus a 95% internet penetration rate in North America. This disconnect means that China’s digital economy has a lot of runway to keep growing at a robust pace for a lot longer — and that continued growth should power continued big numbers at JD.
If the market does play out like that, then JD stock’s 40% year-to-date gain is potentially just the start of something much bigger.
Five Below (FIVE)
YTD Gain: 23%
Rapidly expanding discount retailer Five Below (NASDAQ:FIVE) has found a winning formula in the dynamic retail landscape, and has turned that winning formula into huge gains for shareholders over the past several years.
As the name implies, Five Below sells items that are mostly under the $5 price point. Most of its items are also catered to kids. Thus, Five Below is basically a discount retailer for kids toys, gadgets, games, apparel, etc. Also of note, Five Below employs a dynamic product assortment strategy, so that its shelves never get boring — they are always stocked with the latest and greatest trend, like fidget spinners, selfie sticks, etc.
In other words, Five Below sells trendy items, at big discounts, to young consumers. That’s a unique retail strategy. No one else specializes in that niche. It’s also a winning one, mostly because trendy items always sell, cheap items always sell and young consumers always want to buy (and their parents are normally supportive of $5 or less purchases).
As such, Five Below has reported largely positive comparable sales growth over the past several years, at the same time that the company has been rapidly expanding its real estate footprint. This combination has powered steady 20%-plus revenue and profit growth — huge numbers for the retail industry — and this big growth has in turn powered huge gains in FIVE stock. Year-to-date, shares are up more than 20%. Over the past three years, they are up more than 200%.
As of this writing, Luke Lango was long AMZN, LULU, JD, BABA and FIVE.