It’s tough to find stocks that are holding up right now. Here we are at the end of January and there’s only one sector that’s up on the year and positive over the last 30 days. That sector is energy. When we dig around for retail stocks — like most others — they have been struggling.
The Consumer Cyclical sector is down about 11% so far on the year. The Consumer Defensive group is down 2.8%. If we look at the SPDR S&P Retail ETF (NYSEARCA:XRT), it’s down 12.92% so far in 2022. Energy? The United States Oil Fund, LP (NYSEARCA:USO) is up 13.96%
It’s been a tough run for almost all investors with not-so-pretty price action in abundance. That said, pullbacks like this create opportunities for investors who are patient and are drawn to high-quality companies.
So, let’s take a look at seven retail stocks that fit the bill:
- Target (NYSE:TGT)
- Home Depot (NYSE:HD)
- Lowe’s (NYSE:LOW)
- Nike (NYSE:NKE)
- Lululemon Athletica (NASDAQ:LULU)
- Costco Wholesale (NASDAQ:COST)
- Bed Bath & Beyond (NASDAQ:BBBY)
Retail Stocks to Buy: Target (TGT)
Target may be one of the most attractive stocks on this list. Shares hit new all-time highs in November — albeit, barely — before turning lower. At the recent low, shares were down just over 20% from the highs.
The company had a very good 2021. Despite a turbulent 2020 and a clear disruption to all businesses, Target remained in demand as it was deemed essential retail.
However, 2022 is set to slow down a bit. Analysts expect revenue growth of just 2% for the year and earnings growth of 1%. Will that further derail the shares? It’s certainly possible, but if TGT stock has proven anything, it’s incredibly resilient.
Shares trade at about 17.5 times 2021 earnings and pay a 1.65% dividend yield. The latter was larger until Target’s big stock run. However, it’s not only paid, but it has raised its dividend for 50 consecutive years. The last hike was a 32% increase.
Home Depot (HD)
The home-improvement retailers have been busy during the pandemic. Because home-related issues and repairs don’t stop just because the rest of the world hit pause, Home Depot was also an essential retailer during (and after) the pandemic.
However, it found an unexpected catalyst during the pandemic: Work from home.
While the actual “working from home” action wasn’t exactly a boon for Home Depot and Lowe’s, the improvements that people wanted to make now that they were home all the time certainly was.
Home Depot has been churning out strong results on virtually all measures: Earnings, revenue, margins, e-commerce… you name it.
The strength in the overall housing market certainly helped as well. Given these trends, I expect Home Depot and Lowe’s to continue doing well.
Don’t forget, Home Depot has a hidden catalyst, too. While most retailers’ business peak in Q4, Home Depot’s best two quarters are in Q1 and Q2. That’s not the upcoming quarter, but the ones reported in May and August. Keep that in mind with the HD stock price down 17.5% from the highs.
Retail Stocks to Buy: Lowe’s (LOW)
Like Target, Lowe’s is also a dividend champion. Also like Target, it gave a massive increase to its dividend last summer, raising its payout by 34%. LOW stock has paid a dividend for six straight decades and has raised its dividend for 25 consecutive years.
While Home Depot is trying to make up ground with its own dividend initiatives, Lowe’s has the lead in this regard. However, both retail stocks are excellent plays on the home improvement trend. I don’t want to say they have a duopoly on the industry, but it’s pretty darn close.
They continue to execute well and it’s one of the few retail spaces where Amazon (NASDAQ:AMZN) can’t come in and completely disrupt it. Even better, Lowe’s and Home Depot have turned to e-commerce solutions of their own and are now leveraging that space better than ever.
Even though Lowe’s top- and bottom-line growth is forecast to slow from this year to the next, it’s still moving in the right direction. Once these stocks consolidate, they could be in a solid position to resume higher.
Shifting gears a bit, let’s look at Nike. The company is a premiere sports apparel company and has a unique approach to the retail space. Because it’s an apparel maker and a retailer, it can leverage multiple business units at once.
First, its brands can be found in a ton of retailers’ locations. Second, Nike operates its own stores and outlets. Both approaches have their own pros and cons related to margins and cost. However, its third unit — e-commerce — has very obvious strengths and benefits.
This direct-to-consumer (DTC) format is critical to growing sales, margins and earnings. Customers can go right to Nike’s site and order exactly what they want or need. This not only gives Nike an enormous database of potential future customers, but it also cuts out the middleman.
NKE stock is down about 20% from the highs, but shares popped higher in December on better-than-expected earnings. That came on a top- and bottom-line beat and solid guidance.
Analysts expect modest growth this year (in 2021), but an acceleration to double-digit growth for both revenue and earnings next year — including 30% growth for the latter.
Retail Stocks to Buy: Lululemon Athletica (LULU)
Like Nike, Lululemon has seen its stock come tumbling lower. Unlike Nike though, the company recently provided a negative update to investors.
The company doesn’t normally report its quarterly results until late-March, while its most recent report came in early December. Lululemon reported a top- and bottom-line beat, but guidance was just a hair short of expectations. Still, things didn’t seem so bad.
Less than a month after reporting earnings, the company said it expects both revenue and earnings to come in at the low end of management’s prior range. They said:
We started the holiday season in a strong position but have since experienced several consequences of the Omicron variant, including increased capacity constraints, more limited staff availability, and reduced operating hours in certain locations.
Bad news aside, the LULU stock price is down 35% and that’s giving investors an opportunity to nibble some should they not have a position and want one. Additionally, the company’s DTC approach bailed it out during the pandemic — score one for comfy clothes in a work-from-home environment — and should continue to drive growth and margin expansion in the future.
Costco Wholesale (COST)
Costco is a bit controversial here. Not because it isn’t a great company — in fact, it’s one of the best retail stocks — but because of its valuation.
One of my stock market confessions is that I have always struggled with Costco’s valuation. I don’t own the stock, but I have at periods in the past and at one point way back when, I even worked at Costco.
It’s a great company and all you need to do is look at a long-term chart to realize that’s true.
The company is forecast to grow sales more than 11% this year and for earnings to grow 16%. For next year, forecasts call for another good year: 8% sales growth and 9.5% earnings growth.
Costco’s membership prices allow it to be a cash-flow machine, but it can be hard to overlook the fact that shares trade at 37 times this year’s earnings. That’s after a 16% correction in the stock price.
So who knows, maybe COST stock needs to come down more, but it’s one of the retail stocks investors should have their eye on.
Retail Stocks to Buy: Bed Bath & Beyond (BBBY)
If you thought Costco was a controversial pick for this list of retail stocks, then get ready for Bed Bath & Beyond.
This stock has been incredibly volatile over the last year, as it came part of the “meme movement” from 2021. Even excluding all the hoopla from earlier in the year, while BBBY stock is up in January, shares are still down 50% from the November high.
Bed Bath & Beyond has had an up-and-down year. Dealing with the pandemic and supply chain issues has not made it easy for CEO Mark Tritton, who took over the helm in November 2019. However, he’s been making great strides with the business.
The company has been shedding underperforming brands, significantly boosting its free cash flow and buying back stock. It’s putting more emphasis on e-commerce and its omni-channel operations.
Bed Bath & Beyond has one quarter left in its fiscal year, where it’s expected to lose about 11 cents a share. However, next year the company is forecast to generate earnings of 74 cents per share despite revenue decreasing by 1.5%. That’s called operational leverage and margin expansion. It’s what maximizing your winners and cutting your losers looks like.
Now let’s see if Tritton & Co. can deliver.
On the date of publication, Bret Kenwell 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.