Mashable has a list of the biggest retailers and their plans for Thanksgiving Day, Black Friday and the rest of the holiday shopping season. This year’s Super Bowl of shopping is going to be much more subdued. If you’re in the betting mood, I see seven retail stocks taking most of the victory laps between now and the end of the year.
The first criteria for picking retail stocks that will benefit from this year’s shopping season are those with a strong online presence. Many of the biggest retailers may stay closed on both Thanksgiving and Black Friday to reduce the possible spread of the novel coronavirus and give their employees a bit of a break from previous years.
The second criterion should be retailers that have been doing well throughout the pandemic. Have they reported quarterly growth? The companies that are doing well pre-holiday will likely do well during November and December and into 2021.
And finally, I think it makes sense to bet on those retail stocks whose products are in demand and likely purchases at this time of the year.
- Amazon (NASDAQ:AMZN)
- Best Buy (NYSE:BBY)
- Dollar Tree (NASDAQ:DLTR)
- L Brands (NYSE:LB)
- Lululemon (NASDAQ:LULU)
- Target (NYSE:TGT)
- Williams-Sonoma (NYSE:WSM)
So, despite Peloton (NASDAQ:PTON) not being able to keep up with demand, I doubt it’s on the shopping list for anyone but the wealthiest of gift-givers. However, I’m sure Apple’s (NASDAQ:AAPL) Watches will be given out this holiday season. Happy shopping.
Retail Stocks to Buy: Amazon (AMZN)
To be clear, I’ve only put the e-commerce giant first on my list because I’m ordering the seven stocks alphabetically. That said, it’s hard to go wrong with Amazon during the holidays.
Last year’s holiday shopping season was its best ever as shoppers worldwide bought billions of items for the special people in their lives. Even better, they purchased millions of Amazon devices.
“This holiday season has been better than ever thanks to our customers and employees all around the world,” Jeff Bezos, Amazon’s founder and CEO said the day after Christmas last year. More importantly, Amazon’s third-party sellers made out like bandits last year.
“People bought stuff Amazon didn’t make, too. Third-parties sold way more products on Amazon this year than they did last year,” CNN Business reported. “Although Amazon is notoriously and, for investors, annoyingly coy about specific sales data, the company said third-party product sales increased by a double digit percentage over last year, surpassing one billion items sold.”
Well, Amazon might not break out the sales numbers, but one only has to look at its North American and International sales in the fourth quarter ended December 31, 2019 — North America saw Q4 2019 sales growth of 22% while international sales rose 14% in the final quarter of the year — to know that it did just fine last holiday season.
This year’s fourth quarter is hard to predict, given all that’s happened in 2020. The company’s guidance for operating profits during the quarter ranges from a low of $1 billion to a high of $4.5 billion.
If you own AMZN shares, it expects to go over $100 billion in sales in the fourth quarter, the first time in its history. That’s something you can hang your hat on.
Best Buy (BBY)
As I stated in the introduction, I expect electronic retailers to do well this holiday season. That’s because we could be in for a long winter if Covid-19 continues to restrict how much we can move about outside or personal bubbles.
Having a quality TV, computer and gaming console all becomes a top priority if the country goes into lockdown mode.
Best Buy, the stock, has had an excellent year so far in 2020. Shareholders who bought at the end of 2019 have a year-to-date total return of 38.4% through Nov. 4. That’s four times the performance of the U.S. markets as a whole.
I’ve been a Best Buy fan for a long time.
It started with former CEO Hubert Joly’s phenomenal turnaround of the company. Despite an early test of CEO Corie Barry’s leadership in 2019, just six months after taking over from Joly — Barry was alleged to have had an affair with a former executive but was found innocent of any wrongdoing by an external investigation — she’s handled the entire incident with dignity and class.
It’s one of many reasons I recently named Barry, one of 10 female CEOs that are delivering top-notch performances for the companies they run.
As a result of Barry’s decisive action, Best Buy’s finances have remained sound at a time when many retailers are filing for Chapter 11 bankruptcy protection. It has also allowed the company to raise its minimum wage to $15 per hour for all U.S. workers.
And for a bonus benefit, former Domino’s Pizza (NYSE:DPZ) CEO and savior, Patrick Doyle, became Best Buy’s chairman in June.
Dollar Tree (DLTR)
I was torn between Dollar Tree and Dollar General (NYSE:DG) in the discount dollar-store space.
Dollar General has been performing at a much higher level as a company — DG has 12-month trailing free cash flow of $3.1 billion compared to $1.8 billion for Dollar Tree — and there’s no comparison when it comes to share prices — DLTR has a YTD total return of 1.3% compared to 39.5% for Dollar General.
Dollar’s biggest issue continues to be its Family Dollar stores, which it acquired in 2015 and has been struggling to turn around its margins ever since.
Well, in the second quarter ended Aug. 1, Family Dollar generated same-store sales growth of 11.6%, almost four times Dollar Tree’s comps. For the first six months of the year, Family Dollar’s same-store sales are up 13.6%.
One way the company is boosting customer appeal at Family Dollar is by renovating its existing store network. Dubbed “H2,” these renovated stores have more coolers, more consumables and alcoholic beverages.
In fiscal 2020, the company expects to convert 750 of its stores to the H2 concept, which should continue driving the unit’s same-store sales growth for several quarters.
On the bottom line, the renovations appear to be paying off. Through the first half of fiscal 2020, Family Dollar had an operating profit of $340.6 million, more than three times its profit a year earlier. From an operating margin perspective, they’ve increased 370 basis points to 5.4%, not too far off those of its Dollar Tree stablemate.
DLTR stock is definitely the value play of the two dollar stores.
L Brands (LB)
If there was an unloved retail stock heading into 2020, L Brands was it. Nobody thought it would do anything this year — and yet, its stock is up almost 88% YTD and 96% over the past 52 weeks.
How low did L Brands go? LB stock hit a 52-week low of $8 on March 17, during the big market correction that hit stocks of every kind. The company’s stock was last this low in March 2009, the low point of the financial crisis.
Much of the increase in its share price has to do with the impending split of its Victoria’s Secret and Bath & Body Works brands into two independent publicly traded companies.
Analysts are totally in favor of the plan, which will see Bath & Body Works operate as a pure-play retail business that generates tons of cash. In mid-October, JPMorgan analyst Matthew Boss reiterated his buy rating on LB stock while raising its 12-month target price by 20% to $50. At current prices, that’s a potential upside of 47%.
Bath & Body Works had online sales of $518.6 million in the second quarter, 191% higher than a year earlier. On a year-to-date basis, online was up 141%, while brick-and-mortar stores had a 31% decrease in sales for an overall decline of 1%. By comparison, Victoria’s Secret’s overall sales in the first six months declined by 42% over last year.
Bath & Body Works made $395 million in terms of operating profits in the first half; Victoria Secret’s U.S. operations lost $440 million.
With Covid-19 in full force, I expect Bath & Body Works to do huge online business this holiday season. It’s a long-term buy for sure. Anything good that happens to a separately run Victoria’s Secret is just gravy.
If you don’t buy your someone special an Apple Watch this holiday, a nice alternative is clothing from Lululemon — or at least a gift card for those unsure about their partner’s clothing preferences.
CEO Calvin McDonald continues to grow the company’s business by hiring the right talent.
On Oct. 30, it announced several executive appointments, the most critical being the hire of André Maestrini as Executive Vice President, International. The former Adidas (OTCMKTS:ADDYY) executive is tasked with taking its international expansion to the next level.
Internally, the promotion of 15-year LULU veteran Celeste Burgoyne to President of the Americas and its Global Guest Innovation team suggests McDonald takes diversity and employee development very seriously.
“I am excited to announce these senior leadership appointments, which will enable us to continue to drive our business forward and further strengthen lululemon’s leadership team,” McDonald said in its press release. “Celeste has been instrumental in lululemon’s growth, and from her first day with our company almost 15 years ago, she has made tangible contributions to our culture and our business that have helped us become the lululemon we are today.”
Since McDonald’s appointment in July 2018, LULU stock has gained 173%. Nike’s (NYSE:NKE) up 69% in the same period.
As retail stocks go, LULU has to be on your list this holiday.
I happened to see a recent article suggesting Walmart (NYSE:WMT) might be a better buy than Target. Truthfully, I thought about including the world’s largest retailer in my list of seven retail stocks but decided Dollar Tree would make a better discount store selection because of its valuation.
While Walmart is making big strides on the e-commerce front, it still needs to show that it can consistently make money from its online sales. Estimates suggest it will lose $1-2 billion in 2020 from e-commerce. Up 20.8% in 2020, my gut tells me Target’s the better play.
Raymond James analyst Matthew McClintock recently pointed to the deal Target signed with Levi Strauss (NYSE:LEVI) to expand the number of stores where it sells the denim company’s products from 140 to 500 by the fall of 2021.
“[I]t is increasingly apparent that Target has become one of the most attractive retail distribution points for good and better product of national brands,” Barron’s reported Oct. 7.
McClintock has a strong buy on TGT stock with a target price of $180, providing an upside potential of 13% over the next year.
As retail stocks go, Target has been one of the biggest beneficiaries of Covid-19.
In August, it reported Q2 2020 same-store sales growth of 24.3% — 10.9% for brick-and-mortar and 195% for digital — and adjusted earnings per share of $3.35, 86% higher than a year earlier.
“Our second quarter comparable sales growth of 24.3 percent is the strongest we have ever reported,” CEO Brian Cornell said in August. “We remain steadfast in our focus on investing in a safe and convenient shopping experience for our guests, and their trust has resulted in market share gains of $5 billion in the first six months of the year.”
Last year, I said Target was a better buy than Walmart heading into the holidays. Ditto in 2020.
I’ve always said that Williams-Sonoma is the champion of online retail sales. Years ago, when leading-edge retailers were bragging about online revenues accounting for more than 10% of overall sales, WSM was routinely generating half of its business online.
Here’s what I had to say about Williams-Sonoma in 2016 when I called it the best stock in retail.
“Williams-Sonoma saw Q2 2016 e-commerce revenues increase 8.2% year-over-year to $576 million or 52.5% of overall revenue of $1.1 billion. That percentage is an 80 basis point improvement from Q1 2015 and a 250 basis point improvement from Q4 2015,” I wrote in June 2016. “The increases might be slightly lower than in previous years — Q1 2013 saw e-commerce revenues increase by 11.9% year-over-year — but they are healthy just the same.”
WSM has doubled in the four years since. By comparison, the First Trust Consumer Discretionary AlphaDEX Fund (NYSEARCA:FXD) — WSM is the seventh-largest holding — is up 35% in the same period.
CEO Laura Alber, who’s been in the top job since 2010, recently spoke with Bloomberg about surviving the pandemic.
“We were 56% e-commerce heading into the pandemic. So we were very fortunate that we were able to pivot quickly and capture the shift to digital,” Alber said.
In the second quarter ended Aug. 4, Williams-Sonoma’s e-commerce revenue accounted for 76% of its total sales with same-store sales growth across all three of its banners: Williams Sonoma, Pottery Barn and West Elm.
On the bottom line, it had non-GAAP operating profits of $195.1 million, 108% higher than a year earlier. In terms of operating margins, they improved 620 basis points to 13.1%.
I expect its online holiday revenue to be through the roof. WSM stock is a long-term retail buy.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.