Generally, around the beginning of November, business media starts writing about the best retail stocks to buy to take advantage of the traditional holiday shopping season. That’s generally considered to begin on Thanksgiving Day or Black Friday and run until Christmas Eve.
However, with all the supply shortages the U.S. is experiencing, you could say the games have already begun. For example, Amazon (NASDAQ:AMZN) reportedly sold more than a million toys from its Holiday Toy List in October.
USA Today reports that more than half of Americans have already started shopping for the holidays. If that’s accurate, you can be sure that the pre-Christmas rush won’t be nearly as hectic this year despite the fact the National Retail Federation says U.S. holiday sales will grow between 8.5% and 10.5% over 2020’s results.
In fact, holiday spending is expected to set a record. So, even though the holiday shopping season presents significant challenges for retailers in 2021, it wouldn’t be wise to bet against retail stocks in the final two months of the year.
Here are my seven favorites:
- Amazon (NASDAQ:AMZN)
- Dick’s Sporting Goods (NYSE:DKS)
- Lululemon (NASDAQ:LULU)
- Bath & Body Works (NYSE:BBWI)
- Williams-Sonoma (NYSE:WSM)
- Target (NYSE:TGT)
- Apple (NASDAQ:AAPL)
Retail Stocks to Buy: Amazon (AMZN)
As was said in the intro, Amazon has already hit its stride when it comes to the holiday shopping season. So you can bet that it will be delivering stuff right up to and beyond Christmas to keep its customers happy.
Whether that translates into greater profits is questionable given the extra costs incurred by retailers to get products to North America from overseas. However, Amazon says it’s doing everything possible to ensure supply shortages don’t affect the critical selling season.
This includes doubling the number of ports of entry, increasing its container processing capacity by 100%, expanding its ocean freight carrier network, increasing the number of aircraft for its Amazon Air cargo fleet, and adding 150,000 seasonal fulfillment and delivery roles.
If anyone is going to be prepared for the holiday onslaught, it will be Amazon.
As for the business through the first half of 2021, it has been brisk with revenue of $221.6 billion, up 34.8% from a year earlier. In addition, its operating income for the first six months was $16.6 billion, 69% higher than in the same period last year.
However, due to investments in both its people and business during Covid-19, Amazon’s trailing 12-month (TTM) free cash flow (FCF) was $12.1 billion at the end of June, down from $31.9 billion a year earlier.
If it were almost any other business than Amazon, I’d be apprehensive about the drop in FCF. But, fortunately, it’s the company’s DNA to spend where it feels it needs to at any given time. I expect record holiday revenues.
Dick’s Sporting Goods (DKS)
In September, Dick’s said it would hire as many as 10,000 seasonal employees to ring up the holiday sales. That’s 1,000 more than last year. It will use many of these seasonal hires to provide Curbside Contactless Pickup, help fulfill ship-from-store orders, and serve customers in its stores.
Business-wise, it’s hard to complain if you’re a Dick’s shareholder. Through the first half of fiscal 2021, its same-store sales increased 51%, with a 124% increase from its e-commerce business. As a result, its online sales now account for 19% of overall revenue, up from 12% in the first half of 2019, before the pandemic.
In August, when it released its Q2 2021 results, the company increased its non-GAAP earnings per share to $12.70 at the midpoint of its guidance. Based on this forecast, DKS stock is trading at a very reasonable 9.6x earnings.
On the capital allocation front, shareholders got a lot of good news in August. Not only did Dick’s increase the quarterly dividend by 21% to $1.75 on an annualized basis, but it also paid a $5.50 special dividend on Sept. 24. As for share repurchases, it expects to double the amount it was planning to buy back in 2021 to $400 million from $200 million previously.
With the company’s success in the golf category in 2021, I expect there to be a decent amount of golf paraphernalia under the Christmas tree this year.
Retail Stocks to Buy: Lululemon (LULU)
The athletic and leisure apparel brand recently won the rights to outfit Canada’s Olympic teams from the 2022 Beijing Winter Olympics through the 2028 Los Angeles Summer Olympics. However, there could be more beyond that.
On Oct. 26, the company unveiled its Team Canada uniforms for 2022. If you don’t like the color red, you probably won’t buy any of the 25-piece collection. However, Lululemon is known for making durable yet comfortable clothing, so they’ll likely be in high demand across Canada and ex-pats worldwide.
“Red is the story of confidence, power and pride and that is what our athletes will wear for the opening ceremony when there is a lot of excitement, anticipation and nerves,” Audrey Reilly, Lululemon’s creative director for special projects said about the uniforms in The Globe and Mail. “For the closing, they will wear all-white, when the tension has lessened and the party atmosphere begins.”
For me, a proud Canadian, the awarding of the Olympics outfits is an indication that it has arrived on the global fashion scene. As well, it’s an acknowledgment that Canada can make quality products and develop top-notch businesses.
In August 2016, I suggested that it could be one of the 50 best-performing stocks over the next decade. Halfway through the 10 years, LULU stock is up 460%. I expect the next 5 years could be even better for its shareholders.
Bath & Body Works (BBWI)
This year’s holiday shopping season will be the company’s first as an independent publicly-traded company, fully separated from Victoria’s Secret & Co (NYSE:VSCO) on Aug. 3. Both BBWI and VSCO have performed reasonably well since the separation.
Also, in August, the specialty retailer of liquid hand soaps and other fragrance-based products reported its first quarter as a public company. As expected, they were excellent, with sales up 36% to $1.70 billion from $1.25 billion a year earlier. Compared to its 2019 sales, they rose 54%.
The 19 analysts who cover its stock rate it a buy rating with a median target price of $82. That’s well above its current share price. As for earnings, analysts expect it to earn $4.12 in 2021 and $4.46 in 2022. That’s 15.4x its 2022 earnings.
InvestorPlace’s Thomas Niel recently picked seven mid-cap stocks to rally as the economy strengthens. One of those picks was Bath & Body Works’ former stablemate, VSCO. He believes the stock is cheap at a forward P/E ratio of 7.6x.
BBWI is the better business and stock for my money, despite possessing a P/E multiple that’s double Victoria’s Secret. Quality always wins in retail.
Retail Stocks to Buy: Williams-Sonoma (WSM)
In June 2016, I said the following about the home goods retailer: “Williams-Sonoma, in my opinion, is one of the best stocks in retail, if not the best, specifically, because it is the poster child for omnichannel retail … Again, if you believe omnichannel retail is the way, you must own WSM — warts and all.”
My thought at the time was that its West Elm brand needed to make a more significant contribution to the company’s overall business. In fiscal 2015, West Elm had $821.1 million in sales, accounting for 16.5% of the company’s overall revenue. In fiscal 2020, West Elm accounted for 24.8% of Williams-Sonoma’s overall sales of $6.78 billion.
In 5 years, it leapfrogged the Williams-Sonoma brand into the second spot behind Pottery Barn. Over the past 5 years, West Elm’s sales grew 105%; Pottery Barn’s increased by 22% over the same period. So West Elm remains a vital part of the WSM growth story.
Fortune recently discussed the company’s corporate culture. Amazingly, it continued to pay its store staff throughout the closures in 2020. That will continue to generate goodwill with its employees for years to come.
CEO Laura Alber has been in the top job for 12 years. For the sake of shareholders, you ought to hope she stays for another 12.
In June, I argued that WSM was a better buy than GameStop (NYSE:GME), in large part because of Alber’s performance as CEO. It’s hard to believe you could buy its stock for $31 in March 2020. It’s up 494% in the 20 months since.
It’s one of the best long-term buy among any list of retail stocks.
Brian Cornell was announced as the new CEO of Target on July 31, 2014. TGT stock is up 333% since. At one time, Cornell ran Sam’s Club for Walmart (NYSE:WMT). Walmart’s share price has appreciated by 99% over the same period.
Maybe Walmart should have promoted Cornell instead of letting him get away to Pepsico (NASDAQ:PEP), where he was CEO of PepsiCo Americas Foods, before taking the top job at Target.
In September, the National Retail Federation announced that Cornell would receive its 2022 Visionary award for his work as CEO of Target.
“Brian Cornell’s purpose-driven leadership and strategic vision reflect an unwavering commitment to his team, and a keen ability to cut through the noise and truly understand what American families want and need,” NRF President and CEO Matthew Shay said in its press release announcing the annual award.
Usually, I don’t like to get carried away with my observations of CEOs. It is, after all, the front-line workers that do most of the heavy lifting and deserve the lion’s share of the credit.
But you don’t get a turnaround the magnitude of Target’s — remember, 6 months into the job, he made the bold decision to retreat from its multi-billion-dollar investment in Canada — without confident, top-down leadership.
Good CEOs are hard to come by. Target has one of the best.
Retail Stocks to Buy: Apple (AAPL)
Apple remains an embarrassment of riches.
Back in 2019, JPMorgan predicted that the company’s ad revenue could grow to $11 billion by 2025, up from a very fluid analyst estimate of $2 billion. Recently, some of the top digital ad companies, such as Facebook (NASDAQ:FB), have faced questions regarding Apple’s Identifier for Advertisers (IDFA) policy change, which requires apps to obtain users’ permission before collecting and sharing user data.
“The IDFA stuff, in our view, has only gotten worse this quarter and it needs to be paid attention to even more than it was before,” Ygal Arounian, managing director of internet equity research at Wedbush Securities, said. “That’s the one piece that might be having the biggest impact on metrics.”
Evercore ISI analyst Amit Daryanani believes its ad revenue could hit $20 billion annually by 2025, a ten-fold increase from $2 billion in 2021.
“Advertising represents a high-margin revenue stream for Apple. By 2025, ad revenue could constitute about 17% of Apple’s services revenue and about 5% of total revenue, but 9% of earnings per share, by Daryanani’s math,” MarketWatch contributor Emily Bary stated on Aug. 25.
As for this holiday shopping season, look for Apple to score large with its newest version of AirPods, a product that could generate $20 billion in annual revenue.
Is there anything Apple doesn’t make money on?
On the date of publication, Will Ashworth 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.
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.