The novel coronavirus created a big and scary crisis that brought the U.S. economy to its knees. But it increasingly appears that the worst of the pandemic is over. Over the next few quarters, the economy should reopen and rebound. Consumer spending trends should recover. And beaten-up retail stocks will bounce back in a big way.
Let’s take a step back here.
The pandemic was as serious and scary of a crisis as our nation has faced in recent memory. But the data increasingly implies we have “beaten” the virus, and that better days are ahead. Simply consider:
- The science surrounding Covid-19 has gradually shifted. The most recent data suggests that the virus is not as deadly as initially feared. Rather, it’s only slightly more deadly than the common flu for most individuals under the age of 50.
- Given shifting science, pandemic hysteria is fading. The number of Americans that categorized themselves as “extremely worried” about Covid-19 has dropped from 28% in late March to 23% in late May.
- All 50 states are in various phases of reopening.
- The economic reopening has illustrated that there is ample pent-up demand from consumers. Beaches and restaurants were very crowded over Memorial Day weekend. Malls have reported strong early reopening traffic trends, too.
- Consumer confidence levels have already bottomed — at surprisingly high levels. That’s despite ugly labor market conditions. As it turns out, most consumers who were fired during this pandemic (87%) expect their layoff to be temporary.
In other words, the big economic rebound Americans have been waiting for has finally arrived.
With that in mind, the seven best retail stocks to buy to play this great economic reopening are:
- Kohl’s (NYSE:KSS)
- Urban Outfitters (NASDAQ:URBN)
- Macy’s (NYSE:M)
- Foot Locker (NYSE:FL)
- Under Armour (NYSE:UA, NYSE:UAA)
- Bed Bath & Beyond (NASDAQ:BBBY)
- Crocs (NASDAQ:CROX)
Retail Stocks to Buy: Kohl’s (KSS)
First on this list of retail stocks to buy on the reopening rally is off-mall department store giant Kohl’s.
The bull thesis on KSS stock boils down to three things.
First, the worst is over. Kohl’s stores were entirely shut down for part of March and all of April. That’s a big deal, since 76% of this company’s sales happen in the physical channel. But, Kohl’s began reopening stores in early May. Today, about 50% of Kohl’s stores are open. Within the next few months, that number will move toward 100%. As it does, Kohl’s growth trends will meaningfully recover.
Second, Kohl’s is a strong retailer. The company is both off-mall and off-price. Four out of Kohl’s top five selling brands are private brands (you can only buy them at Kohl’s). About 80% of Americans live within 15 miles of a Kohl’s store. The digital business is on fire, growing at a 17% compounded annual growth rate since 2014. And Kohl’s has a strong loyalty program, with 30 million members accounting for the lion’s share of total sales.
Third, Kohl’s stock is dirt-cheap. Assuming growth trend and profit margin stabilization over the next few years, then my numbers suggest a reasonable 2020 price target for KSS stock of $33.
Urban Outfitters (URBN)
Much like Kohl’s, mall retailer Urban Outfitters is one of the best retail stocks to buy right now for three big reasons.
First, the company’s traffic trends will meaningfully improve over the next few quarters. Management said on a recent conference call that traffic trends are already improving, from down 80% when stores first reopened, to down 60% as of mid-April. This improvement will pick up momentum, because Urban Outfitters is a teen-oriented retail brand, and young consumers are the ones least afraid of Covid-19 — and therefore the ones that will fuel the first wave of the economic recovery.
Second, Urban Outfitters is a strong retailer. Urban Outfitters sells branded clothes, so the company is protected by a product moat. Those branded clothes have been hyper-relevant and super popular for several years now. Urban Outfitters is the third most popular shopping website among young consumers, behind only Amazon (NASDAQ:AMZN) and Nike (NYSE:NKE), according to Piper Sandler’s Taking Stocks with Teens survey.
Third, URBN stock is cheap. My numbers suggest that shares have upside potential to $23 in 2020. The stock should get there on the back of resurgent consumer spending.
Another one of the best retail stocks to buy for a huge second-half economic recovery is Macy’s.
Macy’s has struggled for several years. Negative comparable-store sales growth. Declining gross margins. Falling foot traffic. Rising expense rates. Plunging profits.
Everything has gone wrong for Macy’s over the past few years. And while the company hasn’t figured everything out, the stock is too cheap here to ignore, and could pop in a big way over the next few months as consumer spending trends meaningfully recover.
Macy’s stock trades at less than 0.1 times trailing sales. That’s a bankruptcy-type multiple. So long as Macy’s avoids bankruptcy, Macy’s stock should rebound from here.
The company will do more than just avoid bankruptcy. Macy’s growth trends will significantly improve over the next few months. After all, the company’s stores which are open are already operating at 50% of normal traffic levels. That number will quickly rise to 90%-plus levels within the next few weeks.
As they do, Macy’s will avoid bankruptcy and get back to “normal” much sooner than the market expects. As that happens, M stock will soar.
Foot Locker (FL)
Often times, the market thinks that Foot Locker is just another sporting goods retailer that is doomed for the retail graveyard, like Sports Authority.
But it’s not.
Foot Locker is a differentiated retailer of premium athletic apparel that — due to its strong omni-channel capabilities, branded in-house shopping experience and in-demand product portfolio — is an indispensable piece of the athletic apparel retail distribution network.
That’s why Foot Locker’s revenue growth has been consistently positive every single year in the 2010s. Very few other physical retailers could say the same thing.
Because of its strong positioning in the physical retail market, as that market rebounds over the next several months, Foot Locker’s growth trends will rebound even more emphatically.
Those rebounding growth trends will converge on a discounted valuation (0.4 times trailing sales, versus a five-year-average sales multiple of 0.9) to spark a big rally in FL stock.
Under Armour (UA, UAA)
Athletic apparel maker Under Armour is in trouble today, amid widespread store closures, a plunge in consumer spending and significant brand identity issues.
But this feels like rock bottom.
Over the next few months, the U.S. economy will increasingly normalize. Stores will open back up. Consumer spending trends will rebound. Under Armour’s sales trends will recover.
At the same time, management is committed to clearing Under Armour’s excess inventory levels in 2020, paving the path for new product launches and a potential identity crisis “fix” in 2021. These new products, coupled with secular athletic apparel tailwinds, should turn Under Armour’s growth trends positive in 2021.
Assuming so, then UAA stock is way undervalued below $10. My numbers suggest upside to levels above $10 within the next few months.
Bed Bath & Beyond (BBBY)
One of my favorite retail stocks to buy today doubles as one of the industry’s most promising turnaround stories: Bed Bath & Beyond.
Led by innovative and widely respected Mark Tritton — the former chief merchandise officer at Target (NYSE:TGT) — Bed Bath & Beyond is making all the right moves to modernize itself, stabilize relevancy and market share in the dynamic U.S. retail landscape, and improve its margin profile.
Specifically, Tritton has brought in an entire new management team to:
- Revamp stores.
- Rightsize the real estate footprint.
- Invest in e-commerce and build out omni-channel capabilities like BOPIS (buy online, pick up in store).
- Significantly reduce operating expenses.
- Retool the supply chain to improve gross margins.
Those are all the right steps to be taking. In sum, they should help Bed Bath & Beyond go from shrinking sales, margins and profits today, to stabilizing sales, margins and profits tomorrow.
Even that slight improvement will spark big gains in BBBY stock, since shares trade at a dirt-cheap 0.1 times trailing sales multiple.
Thanks to the rise of the “ugly” fashion trend, Crocs has increasingly turned into the “It” footwear brand over the past few years, powering a near 500% gain in CROX stock from mid-2017 to early 2020.
While retail spending has fallen off a cliff amid the coronavirus pandemic, the “ugly” fashion trend has not.
If anything, it’s gained momentum.
Crocs has become an instant stay-at-home favorite option. The shoes are trending all over social media. The company was one of the only brands to report positive revenue growth in North America in the first quarter of 2020. Domestic and international Google search interest related to “Crocs” has surged to all-time highs in March and April 2020. Crocs.com web traffic is surging, too.
In other words, the Crocs brand has only gained momentum amid the pandemic.
Consequently, as the economy reopens over the next few months and consumer spending trends recover, Crocs is positioned for big sales and profit growth. That big growth will power CROX back to all-time highs.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long KSS, URBN and UAA.