The retail sector depends largely on the health of the consumer, and a consumer’s buying power depends on the overall strength of the economy. With strong job numbers in the U.S. and no sign of a near-term slowdown, investors should look again at specialty retail stocks that may trend higher.
When the market punished retail names, many specialty plays sank lower. But now, if a company’s management can steer away from short-term trends that are hurting sales, the stock can rebound. Investors may pick companies whose strategy updates are appealing and whose brands just needs some advertising support.
Looking ahead, seasonal holiday strength may propel some of these specialty retail stocks higher.
On that note, here are seven specialty retail stocks to buy now.
Retail Stocks to Buy: Ulta (ULTA)
In August, after the company lowered its full-year earnings per share guidance, Ulta (NASDAQ:ULTA) stock fell from the $330 level to as low as $224. The company now expects earnings per share for the year in the range of $11.86 to $12.06, down from the $12.97 consensus estimate. It sees headwinds in U.S. cosmetics. Still, Ulta has a differentiated model that is winning in the marketplace. It is investing in the long term to extend its leadership position.
Over 2019, Ulta grew its market share, built up its brand awareness and delivered on double-digit growth in its active loyalty members.
Ulta’s cosmetics category accounts for around half of its business and enjoys one of the highest margin categories. But year-to-date, growth in this category decelerated to the low single-digits. After slowing down over the last two years and turning negative this year, Ulta needs to stabilize the business. And since its most recent cycle of innovation resulted in a soft cycle for the cosmetics category, ULTA stock is down.
The company is working closely with its brand partners to accelerate innovation and to ensure the updates resonate with customers. Marketing campaigns such as Lipstick Day and Jumbo Love will lead to an uptick in sales. Skincare, which is still a strong segment, will deliver double-digit comparable-store sales. Looking ahead, new exclusive products and brand launches may appeal to potential customers. And this quarter, KKW Beauty by Kim Kardashian West could be a growth catalyst ULTA stock needs.
L Brands (LB)
Hovering near 52-week lows, L Brands (NYSE:LB) guided lower after its quarterly earnings report posted on Aug. 21. In the second quarter, the company reported a 2.8% revenue drop, to $2.9 billion on EPS of 24 cents. L Brands forecast comparable-store sales rising in the low-single digits. Gross margin will be below 37.7%. EPS will be in the range of $2.30 to $2.60 while cash flow will be about $750 million.
The spinning off of Bath & Body Works would vastly improve LB’s valuations. The 4% store comparable (in sales) is weak. Remodeling over 800 stores may not lift sales, either. Management is monitoring the program’s return on investment, so any expansion in square footage that leads to higher sales will help LB’s stock price. Realistically, Bath & Body Works has the growth potential but has downside risks that may distract management.
The core business has growth opportunities through the online channel. Its sleep and lounge business has the potential for growth. As it moves through the fall season, additional marketing support could improve revenue in this segment. With Victoria’s Secret, inventory is at elevated levels. This is deliberate because the company wants to have plenty of flexibility going into the fourth quarter. So, as lead times fall and ordering frequency increases, L Brands will adjust levels as appropriate.
Victoria’s Secret has strong branding but still benefits from marketing. The company will need to revisit its messaging, imagery, photography and price promotion.
If L Brands restores investor confidence, assume a 7% discount rate in a 5-year discounted cash flow EBITDA exit model. At a modest revenue growth rate of 2% annually, LB stock could be worth $28 a share.
TJX Companies (TJX)
TJX Companies (NYSE:TJX) stock is fully valued from a price-to-earnings perspective at 23.7 times, but TJX topped above $60 recently only to pull back. After reporting second-quarter revenue of $9.8 billion, up 4.8% year-over-year, investors may like its prospects ahead.
In Q2, comparable-store sales grew at each of its four major divisions. It enjoyed 20 straight quarters of customer traffic growth. That kind of consistency is an incredible achievement. Not only do its stores appeal to a wide age group, but TJX is attracting the young consumer. Strong apparel sales and market share growth are the main reasons to hold TJX stock. It earned 62 cents a share, up from 58 cents last year. The company returned $579 million through share buybacks (worth $300 million) and $279 million in dividends. It expects to buy back $1.8 billion in shares this year.
The company increased operating expenses to meet supply chain obligations. New store openings also added to costs. But these investments will help the company capture market share in the U.S. home market segment.
By having over 21,000 vendors globally, TJX has tremendous flexibility in sourcing goods. The company may scour for the best deals and earn profits through improving margins. As its recent results demonstrated, the company is a dominant player in the brick-and-mortar retailing. E-commerce giants like Amazon (NASDAQ:AMZN) cannot match TJX in having an effective retail space. And as TJX builds its retail chains, it will capitalize on attractive real estate locations.
Looking ahead, the company will continue driving traffic and sales in its stores. By offering a wide range of goods with strong product availability, satisfied customers will keep coming back. Plus, with the upcoming holidays, happy treasure-hunting consumers will keep coming back to TJX stores.
Lululemon Athletica (LULU)
At all-time highs, Lululemon Athletica (NASDAQ:LULU) stock is not for value investors. Strong sales in the second quarter suggest the growth momentum will continue. How did the company achieve an 11% growth in comparable-store sales, double the consensus estimate?
Lululemon has quality products that are also fashionable. It is offering not just athletic clothing but styles that suit the office, traveling and commuting. But Lululemon’s “Power of Three” growth initiative lifted sales so well that men’s clothing sales outpaced that of women’s sales. Its Fast & Free line, with biking shorts, resonated with customers. In the men’s section, shorts and the Pace Breaker and Surge lines did well in Q2.
Internationally, sales strength in Q2 will continue in the third quarter. And in the Asia-Pacific region, both e-commerce and stores are performing well. After opening eight stores, sales continued to perform so well that Lululemon will aggressively open more stores in the back half of the year. In China, the company opened 15 and by the end of the year, it aims to have 25-30 stores. Although the U.S.-China trade war rages on, Lululemon is exposed to only a 6% tariff on finished goods. Thanks to diversifying its vendor base, this tax rate is lower than in previous quarters. Still, the full-year impact from the new tariffs will be 4 cents or 5 cents a share.
For the year, the company expects to open 45-50 stores. EPS for 2019 will be between $4.63 and $4.70.
V.F. Corporation (VFC)
V.F. Corporation (NYSE:VFC) stock plunged from the $90 range to $81 per share after the company reported quarterly earnings on Oct. 25. Non-GAAP earnings per share of $1.26 missed consensus estimates by 4 cents. Revenue rose 5.3% to $3.4 billion. Despite the miss, V.F. raised its dividend by over 10%, so at a 48 cent quarterly dividend, the stock gives some income.
The V.F. Corporation touts itself as powering the movements of sustainable and active lifestyles. Its fiscal 2024 strategy is simple: Drive and optimize its portfolio, accelerate its transformation and grow in Asia. In Q2, the company reported positive growth in revenue, gross margins and sales. Growth in China of 20% is especially noteworthy, driven by each of the big four brands. Although net income growth is only 6% higher, the stock’s correction creates an entry point. At 27 times earnings, the stock was due for a drop. Yet growth, especially from Vans and North Face, suggests the business will only get stronger.
Based on strength in the North Face brand, V.F. raised its full-year growth to between 9%-10%. This is ahead of its long-term growth target. Conversely, the Dickies brand faced some headwinds in the quarter. The timing of shipments in the U.S. mass channel hurt results. If excluded, revenue increased by 6%. And in the next five years, growth in China, lifestyle, direct-to-consumer and digital wholesale will lead to improved revenue growth.
Foreign exchange and tariffs are ongoing headwinds to the business, along with disruptions in Hong Kong. Eventually, these macroeconomic risks will get resolved. And when they do, VFC stock will recover.
Etsy (NASDAQ:ETSY) is, as it describes itself, a scaled, global, two-sided marketplace for unique and creative goods. Because its business model is capital light and cash flow accretive, returns grow as the retailers on the site get larger. At the end of June 2019, Etsy had 43 million active buyers shopping at 2.3 million active selling businesses. Etsy has a strong moat with a marketplace that offers unique and handcrafted goods.
On Oct. 30, Etsy updated its guidance to incorporate the impact of the Reverb business acquisition. This sent the stock down 17% during intra-day trading. Etsy’s revised outlook includes higher gross merchandise sales and year-over-year revenue growth. But the adjusted EBITDA margin of just 1% needlessly scared off investors.
Etsy has habitual buyers to thank for its continued growth. These customers made six or more purchases and spent over $200 in a one-year period. This buyer type was the fastest-growing segment in the quarter. International gross merchandise sales grew 38% in the quarter. U.S. buyers from international sellers led to gross merchandise sales growth of 37%.
Holding ETSY stock gives investors exposure to the growth potential of the entrepreneur economy.
In the first quarter, Etsy paused its marketing activities to test its incremental progress. Upon optimizing those tests, it entered the second quarter with a portfolio of marketing and product investments that will drive business growth. Google marketing, progress in social channels and a TV campaign called “Belongings” will all lead to higher visits and purchase intent.
Etsy refined its search and discovery in Q2. The home page is more personalized and dynamic, so buyers may continue from where they left off. Its mobile app is undergoing a multi-year effort that the company expects will have a positive impact on its site traffic.
Investors are not likely to consider the used vehicle market as a specialty retail investment. Auto companies are often categorized under cyclical retail plays. Yet CarMax (NYSE:KMX) offers a secondary market for bargain hunters willing to pay significantly less than retail prices for used cars. And although KMX stock surged from the $85 range to $95 after its Q2 report, the stock is inexpensive relative to its growth potential.
CarMax reported unit sales growth of 6.2% to 209,091. Used vehicle sales grew 9.3% year-over-year to $4.4 billion. The average selling price for used vehicles rose to $20,581 while wholesale vehicle prices rose 2.7% to $5,090. The company reported outsized growth because of its relentless focus on the customer experience. It also rolls out new capabilities regularly.
The company tested and launched new customer progression offerings and enhanced selling tools for its associates. This will provide a seamless transition between online and in-store interactions, benefiting both customers and employees.
Having established its operational capabilities, CarMax will support the business through marketing and promotional support. And with healthy coverage at no more than 60 miles apart from each store, customers do not need to travel far to get to a physical location.
At a 52-week high, KMX stock may not appeal to value investors yet. Bearish investors may build a downside scenario that assumes a conservative 17 times terminal EBITDA multiple. If the EBITDA margin is just 7.1%, then investors will want to wait for CarMax stock to pull back before buying.
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As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.