Americans have hit a “pandemic wall” and many want to try some retail therapy.
For the millions of consumers who can work from home during the outbreak, savings are piling up. On the other hand, the millions more who can’t work are anxiously waiting for Covid-19 relief checks and their doses of the vaccines.
Either way, it looks like 2021 will be a good year for retailers and retail stocks. Now, analysts are looking beyond the four retail horses of the pandemic — Amazon (NASDAQ:AMZN), Walmart (NYSE:WMT) Costco (NASDAQ:COST) and Target (NYSE:TGT). They want returns that are above average and they’re finding that in previously beaten-down names. Some of these picks are mainly living on hope, but others might really zoom once we get off Zoom (NASDAQ:ZM).
So, without further ado, here are 7 retail stocks that are ready for a rebound.
- Kohl’s (NYSE:KSS)
- TJX (NYSE:TJX)
- Nordstrom (NYSE:JWN)
- Bed Bath & Beyond (NASDAQ:BBBY)
- Macy’s (NYSE:M)
- Kroger (NYSE:KR)
- Simon Property Group (NYSE:SPG)
Analysts who believe that there will be a retail rebound for 2021 have focused a lot on Kohl’s. Since I wrote about the company in mid-November, KSS stock is up 0ver 100%. The key to this rise is CEO Michelle Gass. Since joining Kohl’s in 2018, she has shown a willingness to try different strategies.
Before Gass arrived, Kohl’s was just a discounter selling clothes and home goods. It lived in big strip mall locations, somewhere between the Macy’s and the Target.
But Gass has been breaking up the stores and bringing in full-price merchandise. She’s also set up stores with sections for Under Armour (NYSE:UAA) products as well as a section for Amazon returns. Gass has even rented out space to Planet Fitness (NYSE:PLNT).
And she hasn’t stopped there. Gass has made more moves since reopening, launching agreements with Land’s End (NASDAQ:LE) and privately-owned Eddie Bauer. She has also partnered with Sephora, which is owned by LVMH (OTCMKTS:LVMUY).
The result is an updated version of the old department store, with brands running the departments and a substantial e-commerce effort. Online now represents about one-third of revenues. The deal with Amazon has also increased visits.
Yet, even at its present price, Kohl’s is still selling for barely half of last year’s sales. Before the pandemic, revenues averaged $20 billion per year. So, the coming year will say a lot about Gass’ strategy, as work-at-homers escape confinement and spend more money.
The shares in off-price retailer TJX — which owns TJ Maxx, Marshall’s and HomeGoods — managed to stay in line with the market during the pandemic.
Now that the vaccines have arrived, TJX stock is fading, down by less than 1% year-to-date while the S&P 500 is up by about 4%. And that’s even despite TJX reinstating its 26-cent dividend, which was suspended during the pandemic.
In a market that’s chasing butterflies, TJX stock looks like a dog. However, it is a well-run company and every dog has its day. The company has gotten through the pandemic by reshuffling its store pack and going where the shoppers are, closing downtown stores while opening in outlet malls. After years of resistance, it has also launched online sales at HomeGoods. Plus, the company has started to focus on its strongest regions and on lowering costs, with a new mid-Atlantic warehouse.
Sales fell off a cliff to $4.4 billion in the first quarter of the pandemic, but recovered to $10.1 billion during the October quarter. Net income also returned to near-normal, at $867 million. Moreover, while long-term debt went up to $13.2 billion, cash on hand increased to $10.5 billion. Operating cash flow is also better than it was before the pandemic, coming in at $4 billion for the most recent quarter.
Bears are looking at the stores’ falling margins and the company’s past as reasons for caution. However, this is not TJX’s first rodeo. CEO Ernie Herrman has been leading the company for some five years. This name has a strong balance sheet and has recovered from the pandemic, even while its middle-class customer base has not.
As policymakers shift to boosting demand and creating middle-class jobs, companies like TJX should benefit.
While the pandemic has killed off many retailers, it didn’t kill Nordstrom. Rivals like Brooks Brothers and Neiman Marcus have gone bankrupt. But Nordstrom carries on.
Now, the company expects sales to grow by 25% in fiscal 2021, with profits growing even faster. The company hopes to grow sales at its Nordstrom Rack outlet stores to $2 billion. CFO Anne Bramman noted:
“We’re seeing sequential improvement in our trends. And we have since the second half of the year as we saw stores reopen […] as people think about the vaccine, we’ve seen that they really are focused on what they’re wearing outside of the home.”
What’s more, Evercore says that Nordstrom’s investments in technology will make it the “Amazon of fashion,” with customers on track to be able to choose from some 1.5 million items online. Department stores like Nordstrom have also long been known for their personal shopping services, but now nearly one-third of those appointments are virtual for the company.
That said, Nordstrom’s survival and upbeat outlook have yet to boost the JWN stock price. Shares fell after its investor event on Jan. 26. The company had predicted operating margins over 6% and a net income between $4 and $5 per share after fiscal 2021.
What analysts are seeing is a “new normal” where people continue to work at home. That’s taking out a huge chunk of high-end retail sales. However, if Nordstrom can take advantage of a vacuum in high-end clothing, it could bring back its dividend and become a sound, conservative investment for years to come.
Bed Bath & Beyond (BBBY)
Back in January, Bed Bath & Beyond became a favorite of Reddit traders because short-sellers held two-thirds of the shares. The stock went as high as $54 a piece before returning to Earth in February.
BBBY stock became a favorite among the Reddit crowd because its market capitalization was modest and analysts were down on it. More analysts now say you should sell the stock than buy it, although their price targets are ahead of where the stock is currently trading.
For the Redditors, that modest market cap and bearish sentiment meant small purchasers could push the price higher against a short squeeze. Shorts borrow shares — often with leverage — and must buy them back. So, raising the price can force them out because margin loans must be recapitalized against losses.
While other meme stocks like GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC) took advantage of their fame to recapitalize, BBBY already had its plan in place. The company sold its Cost-Plus World Market chain to private equity. It also closed a slew of flagship stores.
The savings from this are going into remodeling the remaining Bed Bath & Beyond locations. The new stores will be less crowded and place compatible products together in uniform room “looks.”
So, as operations and appearances improve, the second phase of CEO Mark Tritton’s plan is beginning to take shape behind the scenes. Tritton plans to launch high-quality store brands in place of the discounted national ones. The result should be that, even as sales decline, profits will increase.
This is a multi-year plan that has worked well for other stores. However, the marketing and execution need to be solid for it to be pulled off. In the near term, shares may fall further. Today, BBBY stock’s price is stretched based on recent results. But the fundamentals are in place and the rebuilding efforts are on schedule. Because of that, if you can catch this name below $25, I consider it a good speculation.
Right now, Macy’s is trying to reinvent itself.
For instance, Market by Macy’s aims to bring the troubled department store back to where the shoppers are: suburban strip malls. The company has opened two locations so far in the Dallas-Fort Worth area and early results are promising. In fact, a recent Placer.ai study of foot traffic found the new store much more popular than other nearby apparel retailers, even while the company’s main stores circle the drain.
The company’s holiday results will be reported on Feb. 23. For revenue of $6.51 billion, the “whisper number” on earnings is 40 cents. If Macy’s can start to make money again, the stock will look dirt cheap.
Shopping malls were dying before the pandemic and Covid-19 put the final nail in the coffin. That’s why these Market stores are so important. Macy’s is continuing to close mall units and will shutter 125 of them over the next few years. The new stores are just 20,000 square feet while the company’s mall anchors can be five times that. Finally, the new stores can offer same-day delivery through DoorDash (NASDAQ:DASH).
Management believes this new format can be a winner. Now, the plan is to launch a Bloomingdale’s in a similar way, this time in Fairfax, Virginia. The new store will be called “Bloomie’s.”
Macy’s is looking at a multi-year transformation effort in a world where retailing changes as fast as Internet. The company remains saddled with mall real estate. Its strip mall outlets also can’t do the volume the old stores could. Plus, e-commerce is constantly facing new competition.
So, M stock is in the bargain bin for a reason. Its reinvention is smart, but it’s not moving at the market’s pace. Unless someone buys it for the infrastructure, don’t expect big gains in 2021.
At a time when the average stock in the S&P 500 sells for 25 times earnings, here’s one that sells for about 9 times. You can get this name for about $34 per share. In fact, KR stock will even pay you just to own it — of course, in the form of dividends.
Kroger is at the heart of every big trend in retailing, but the shares have barely budged. Do you want a shopping cart that checks you out itself? Kroger has that. How about a whole store without checkers? The company has that in testing. KR is even offering solutions for online grocery buying and on-site “ghost kitchens” for food pick-up and delivery.
Kroger is actually “winning the digital race,” according to Progressive Grocer. With sales zooming through the pandemic, its private brands are selling faster than average. It has even managed to address my main complaint about the company, its lack of a cohesive identity. Now, all of its groceries feature the same brand message: “Fresh for Everyone.”
Yet, somehow Kroger was worth more five years ago than it is today.
Back when Kroger last split its stock in 2015, it was America’s second-largest grocer — behind only Walmart — with over $100 billion in sales. Today, it’s at $132 billion, but it’s in stiff competition with Costco and even Amazon.
Walmart is growing its top line even more slowly than Kroger, its yield is lower, yet WMT stock has outperformed the grocery chain. Kroger is selling for less than 25% of its sales. Meanwhile, Walmart is selling for over 70%.
Simon Property Group (SPG)
Simon Property Group, America’s largest shopping mall landlord, spent 2020 becoming its own biggest tenant. During the pandemic, it helped buy out four of its tenants — Forever 21, Brooks Brothers, Lucky Brand and JCPenney. It also already owned Aeropostale, acquired in 2016. Now since the start of 2021, shares are up about 25%.
SPG is organized as a real estate investment trust (REIT). It’s not designed to be an operating company. Instead, it’s supposed to buy real estate (mostly for debt), rent it out and hand the profits to shareholders. Even after cutting its dividend last year, it’s yielding 4.6% at its Feb. 18 price of almost $106 (though that dividend might get cut again based on recent earnings).
The secret to Simon buying its tenants is its operator, Authentic Brands. Authentic is nominally in the media business, owning the branding rights to celebrities like Elvis Presley and Marilyn Monroe. They also have rights to living celebrities like Shaquille O’Neal. But it’s the “retail apocalypse” that has made Authentic huge. The Aeropostale model has been applied to many other retailers. Basically, the strategy is to buy brands out of bankruptcy, use the resources of partners like Blackrock (NYSE:BLK), then build the brands both online and offline.
By taking a piece of these new deals, Simon has assured itself rent. It also retains profit participation. So, the success of Authentic lets SPG play hardball when other tenants go under.
Now, the company insists that leasing is picking up. It also completed the purchase of Taubman Centers and is preparing to buy other properties. Plus, SPG owns more than just suburban malls. With help from Authentic, it can move merchandise from those locations to dozens of its outlet centers and minimize losses. Right now, SPG stock is currently selling at a little over 25 times forward earnings, even with the value of malls down 45%.
So, with some economic green shoots and an end to the pandemic in sight, Simon has the chance to deliver authentic earnings over the next five years.
On the date of publication, Dana Blankenhorn held a long position in AMZN.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.