Investors are delighted about the prospect of an upcoming back-to-school shopping season soon because this means a boost for a handful of retail stocks. Millions of students are ready to return to classes for the first time since the early months of the Covid-19 crisis. The novel coronavirus pandemic led to a shift to remote instruction, and Zoom (NASDAQ:ZM) classes for students of all ages have become the norm.
While the return to schools moves at a gradual pace, this fall semester is expected to see a large number of students get back into classrooms. That said, the back-to-school season is the second-most important shopping season for retailers. Therefore, retail stocks are poised to see lucrative gains during this period. Therefore, I will discuss seven retail stocks to buy for a back-to-school boom.
There is significant pent-up demand for back-to-school products ranging from school supplies to sneakers to laptops. According to a forecast from Deloitte LLP, back-to-school spending is expected to reach $32.5 billion, up 16% from 2020 and 17% from 2019, averaging out to around $612 per student.
In turn, investors should keep an eye on specific themes when investing in back-to-school retail stocks. And while we will most likely see surging demand for a variety of goods, apparel and technology should be two vital areas.
As many students will likely abandon Zoom classes for an in-person classroom experience, apparel retailers are primed to be the biggest beneficiaries. In fact, Mastercard (NYSE:MA) expects apparel sales to jump 78.2% from 2020 during this back-to-school season.
Given the robust sentiment and soaring consumer confidence, these seven retail stocks are poised to benefit significantly from the booming back-to-school shopping season.
- Chegg (NYSE:CHGG)
- Kohl’s (NYSE:KSS)
- Levi Strauss (NYSE:LEVI)
- Macy’s (NYSE:M)
- Skechers USA (NYSE:SKX)
- Target (NYSE:TGT)
- Walmart (NYSE:WMT)
With all of that in mind, let’s dive in and take a closer look at each one.
Retail Stocks to Buy: Chegg (CHGG)
52-Week Range: $62.84 – $115.21
Our first choice for today has a more education tilt than a retail edge. The Santa Clara, California-based Chegg is an educational services company that specializes in textbook rentals, course assistance, and online tutoring. Its leading direct-to-student learning platform focuses mainly on high school and college students. Chegg offers various materials that include printed and online textbook rentals and purchases, internships, and college admission services.
The group announced second-quarter results in early August. Revenue increased 30% year-over-year (YOY) to $198.5 million. Non-GAAP net income stood at $71.7 million, or 43 cents per diluted share — up from $49.3 million, or 37 cents per diluted share in the prior-year quarter. Cash and equivalents ended the quarter at $841.8 million.
On the results, CEO Dan Rosensweig cited, “Chegg had a great Q2 with total revenue growth of 30%, driven by 38% growth in Chegg Services revenue with Chegg Services subscribers growing to 4.9 million in the quarter. Our international growth also continues to be strong, and we are confident we will exceed our initial expectation of over one million international subscribers for the year.”
Chegg benefited from a surge in demand during the pandemic. It offers different levels of subscription, with the most expensive at less than $20 per month. Wall Street expects most subscribers to keep their subscriptions active even as the pandemic wanes away.
Meanwhile, its international expansion is still in its early stages. Management anticipates global operations to grow steadily in the next few years.
CHGG currently stock trades just above $80, down 11% year-to-date (YTD). CHGG shares trade at just under 14 times current sales and nearly 52 times forward earnings. Investors could regard any potential decline as an opportunity to buy into this growth name in education.
52-Week Range: $18.28 – $64.80
Dividend Yield: 1.75%
Department store chain Kohl’s operates specialty department stores, as well as an e-commerce site. The company has more than 1,100 department stores stateside.
Kohl’s issued Q2 results on Aug. 19. Revenue came at $4.48 billion, up 30.5% YOY. Net income of $382 million translated into diluted earnings per share (EPS) of $2.48, a record number. As a result of strong sales, management raised FY2021 guidance to $5.80- $6.10.
On the metrics CEO Michelle Gass cited, “Our performance in the second quarter marked another important step in further establishing Kohl’s as the leading destination for the active and casual lifestyle. We delivered record second quarter earnings with sales and margins materially exceeding expectations.”
Kohl’s has recently forged a partnership with Sephora, a brand owned by LVMH Moet Hennessy Louis Vuitton (OTCMKTS:LVMUY). As a result, Kohl’s is expected to open Sephora shops in 200 of its stores by the end of 2021. In turn, the partnership could contribute around $2 billion to Kohl’s top line and fuel strong earnings growth within the next few years.
KSS stock hovers at $59, and has rallied about 45% so far this year. Also, shares have gained more than 213% over the past 12 months. Forward price-earnings (P/E) and price-sales (P/S) ratios are 16.08 and 0.51, respectively. Despite the recent gains, interested readers could still find value around these levels.
Retail Stocks to Buy: Levi Strauss (LEVI)
52-Week Range: $11.91 – $30.84
Dividend Yield: 1.17%
Levi Strauss needs little introduction. Its product range includes jeans, casual and dresses pants, tops, shorts, skirts, jackets, footwear, and related accessories under Levi’s, Dockers, Signature by Levi Strauss & Co. and Denizen brands.
Levi Strauss announced Q2 results in early July. Net revenue surged 156% YOY to $1.3 billion. Adjusted net income came in at $93 million, or 23 cents per diluted per share, compared to an adjusted net loss of $192 million, or 48 cents per diluted share, in the prior-year quarter. Cash and equivalents ended the quarter at $1.2 billion.
CEO Chip Bergh remarked, “We generated strong momentum in the second quarter with the accelerated recovery of our revenues and delivered growth across all regions and channels. This was underscored by the strength of our brands and our ability to capitalize on evolving denim trends and a continued shift to casualization.”
Levi’s business seems to be rebounding well from the downturn in revenue and profits during the pandemic. Management also expects the growing e-commerce business to drive profits higher. The high-margin e-commerce business grew 42% YOY in the first quarter.
LEVI stock is up almost 37% so far this year, and hovers slightly above $27 — trading around 2.1 times current sales and 17.8 times forward earnings. Despite gaining nearly 125% in the past year, LEVI stock shares do not look too expensive for a company estimated to report double-digit annual gains in profits.
52-Week Range: $5.57 – $23.14
Macy’s operates around 725 stores under three brands: Macy’s, Bloomingdale’s and the Bluemercury specialty beauty stores. The group announced Q2 metrics on Aug. 19. Revenue came at $5.65 billion. Net income of $345 million translated into $1.08 per share. A year ago, the company had lost $431 million, or $1.39 per share.
The retailer finished Q2 with approximately $2.1 billion in cash. Investors were pleased that Macy’s would be reinstating the regular quarterly dividend at 15 cents per share. Management also hiked its profit and sales outlook for FY21.
CEO Jeff Gennette commented, “Second quarter results were strong across all three nameplates and surpassed our expectations. Our momentum in the first quarter accelerated in the second quarter as we successfully reengaged core customers and attracted new, younger customers with new brands and categories.”
The company reported 5 million new customers in the first quarter, with 41% derived from its digital business. While the Delta variant may slow its sales recovery in the near term, the past few months have shown that American consumers still like shopping at malls and department stores. Management is confident about its capability to generate strong cash flow for the rest of the year.
Macy’s shares currently trade above $23. They are up about 105% so far this year. And despite gaining 268% over the past year, Macy’s shares do not look overvalued, as they trade only at 11.25 times forward earnings and 0.35 times current sales.
Retail Stocks to Buy: Skechers USA (SKX)
52-Week Range: $28.25 – $55.87
Manhattan Beach, California-based Skechers USA is a footwear company whose products include various styles of women’s, men’s, girl’s, boy’s, performance, and work shoes.
Skechers released Q2 results in late July. The company reported a record quarterly revenue of $1.66 billion, representing a 127% YOY increase. Net earnings came in at $137 million, or 88 cents per diluted share, compared to a net loss of $68 million, or 44 cents per diluted share, in the prior-year quarter. Cash and equivalents ended the period at $1.09 billion.
On the results, CEO David Weinberg remarked, “This growth, along with both record gross margin of 51.2% and record quarterly diluted earnings per share of $0.88, was the result of triple-digit improvements in both our domestic and international businesses compared to second quarter 2020, and over 30% as compared to the second quarter of 2019.”
Strong consumer demand provided a significant tailwind for impressive top-line growth during the economic recovery. Skechers also has a strong market presence in its international segment, which accounts for 58% of sales. China is a primary growth market with a 174% increase in second-quarter sales. Domestic wholesale also rebounded with a 200% increase. Additionally, Skechers launched a new website in 2020, leading to a 143% increase in U.S. e-commerce sales.
Management raised third-quarter guidance to $1.6-$1.65 billion in sales based on its robust second-quarter performance. SKX stock hovers at $51.30. It is up more than 42% YTD. Forward P/E and current P/S ratios stand at 20.79 and 1.38, respectively. Interested reads could regard any short-term decline in price as a good opportunity to buy into the shares.
52-Week Range: $143.38- $267.06
Dividend Yield: 1.42%
With its 1,900 stores Target offers various products across several categories. In addition, the company has a considerable e-commerce presence, deriving around 18% of its sales from the channel.
Target announced Q1 results in mid-May. Total revenue increased 23.4% YOY to $24.2 billion. Net income was $2.1 billion, or $4.17 per diluted share, up from $284 million, or 56 cents per diluted share in the prior-year quarter. Non-GAAP EPS of $3.69 was up 525% YOY. Cash and equivalents ended the quarter at $7.82 billion.
CEO Brian Cornell remarked, “Importantly, market-share gains of more than $1 billion in the first quarter, on top of $1 billion in share gains a year ago, demonstrate Target’s continued relevance with our guests, even as they have many more shopping options compared with a year ago.’’
Target has become a leading online retailer thanks to years of investment in its omnichannel infrastructure. The company has launched a robust mix of digital shopping options. It has invested in technologies, modernizing its supply chain, and improving websites and mobile apps.
Now it is able to compete with well-known e-commerce players. Target is also a leader in same-day shipping options, which grew triple-digits during the pandemic. Target makes full use of its 1,900 stores to get products to homes faster and cheaper.
TGT stock is a Dividend Aristocrat, and offers a dividend yield of 1.42%. It currently trades above the $250 territory, up 42% YTD. Forward P/E and current P/S ratios are 21.46 and 1.27, respectively. A potential decline toward $240 would improve the margin of safety.
Retail Stocks to Buy: Walmart (WMT)
52-Week Range: $126.28 – $153.66
Dividend Yield: 1.45%
Walmart is America’s largest retailer by sales, operating over 11,400 stores, selling various general merchandise and grocery items. Its e-commerce business also continues to grow rapidly. With a market share of 5.3%, Walmart is already the second-largest e-commerce company in the U.S after Amazon (NASDAQ:AMZN).
The group announced Q2 2022 results on Aug. 17. Total revenue stood at $141 billion, up 2.4%, negatively affected by approximately $8.9 billion related to divestitures. Consolidated operating income surged 21.4% YOY to $7.4 billion, while net income came in at $4.28 billion, or $1.52 per diluted share. Cash and equivalents ended the quarter at $22.9 billion.
Following the results, CEO C. Douglas McMillon remarked, “Our global eCommerce sales are on track to reach $75 billion by the end of the year, further strengthening our position as a leader in omnichannel. We grew market share in U.S. grocery, added thousands of new sellers to our marketplace, rapidly grew advertising businesses around the world, and we’re finding innovative ways to commercialize our data and build technology.”
The company has recently forged partnerships with Shopify (NYSE:SHOP) and Goldman Sachs (NYSE:GS) and invested in online e-commerce platform Flipkart. In addition, the company recently launched Walmart+, a subscription program that includes shipping, gasoline discounts, and a faster checkout process at the stores.
The mega-cap retailer is essentially a blue-chip business. WMT stock is also a Dividend Aristocrat, currently offering a dividend yield of 1.45%. The shares hovers below $150, up 3.5% YTD. Forward P/E and current P/S ratios stand at 25.51 and 0.76, respectively. Therefore, we’d look to buy the dips in WMT shares.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.