Over the last three pandemic years, retailers enjoyed a tremendous boom from above-trend goods demand. Consumers were flush with cash, and since they couldn’t spend on services, they compensated by overbuying goods. Now that the pandemic is over, this trend is reversing. Consumers are going out and traveling more. Thus, considering this shift to services, investors must be selective when choosing retail stocks to buy. Previously, the rising tide lifted all boats. But looking ahead, only retailers that offer a unique value proposition will thrive.
From now on, analysts expect goods demand to decline, posing a challenge for some retailers. While retail sales were strong in the first quarter of 2022, the National Retail Federation (NRF) forecasts 4% to 6% growth this year. This is a slowdown from the 7% annual growth in 2022. As consumers draw down on their pandemic savings, analysts expect retail sales growth to revert lower to its historical trend. Another headwind for the sector is the challenging economic backdrop. Furthermore, it is still not clear what the impact of the March bank turmoil will be on retail spending.
Consumers will likely be more price sensitive and defer discretionary spending. Thus, retailers that sell a higher share of discretionary items will underperform. In contrast, those that sell basic staples such as groceries and household necessities can weather the downturn. Also, consumers will be hunting for value, which bodes well for big box retailers that enjoy cost advantages due to their economies of scale. They can reduce prices for constrained consumers, allowing them to gain market share from smaller peers. Finally, some categories supported by secular trends will continue to thrive. For instance, internet retailers will grow as more retail spending shifts online.
Here are three retail stocks to buy for potentially huge gains in 2023.
Retail Stocks to Buy: Costco (COST)
Considering the prospects for a weakening economy, Costco (NASDAQ:COST) is the perfect retail stock for this market environment. Its everyday low-pricing strategy offers some of the lowest prices in retail. Consumers will shift to price-conscious shopping as they start feeling the pinch from diminishing household balance sheets and rising unemployment. Fortunately, Costco is well positioned in this area. Moreover, since the start of the pandemic, Costco’s voracious fanbase has grown. Already, there are millions of social media posts on treasure hunting using hashtags like #costcofinds. As a result, Costco is garnering more interest, and shoppers will continue to troop to its stores.
After correcting from its 52-week high of $609.18, the stock presents an opportunity. Although Costco enjoys a premium multiple over peers, it constantly ranks highest among consumers in terms of product price, quality and brand trust. The stock trades at a forward price-to-earnings (P/E) ratio of 32. Despite the higher relative valuation to peers, TipRanks analysts expect over 7% upside. Considering its stellar financials, Costco offers unrivaled affordability, making it one of the retail stocks to buy.
In the retail month of March 2023, the company reported -1.1% year-over-year (YoY) comparable sales growth. However, excluding foreign exchange and gasoline fluctuations, the change was still a healthy 2.6%. Furthermore, the company has many levers to pull to continue driving revenue growth. First, while industry growth rates normalize to lower rates, Costco is expected to gain market share. Its best-in-breed private label, Kirkland, offers consumers the savings and quality they need. Secondly, it might still generate more upside by increasing its membership fees. The last three membership hikes were in 2006, 2011 and 2017. Therefore, a hike that has been a historical catalyst for the stock is overdue.
E-commerce adoption has picked up pace, especially during the pandemic period. However, according to Morgan Stanley, online shopping is still in its early innings. For example, they expect 20% compounded annual growth in Latin America over the next five years. Given the vast opportunity for e-commerce penetration, this presents a massive tailwind for MercadoLibre (NASDAQ:MELI). This e-commerce powerhouse is the largest online marketplace in South America. Due to its large selection and short delivery times, consumers have been flocking to its site.
Its e-commerce division continues to hit milestone after milestone. Since 2019 the company has tripled its gross merchandise volume (GMV). And for the first time, in fiscal year (FY) 2022, the company achieved sales of over $10 billion. Its logistic network Mercado Envios also executed perfectly, shipping over one billion items. Revenue growth rates continue to impress. In Q4 2022, it reported revenue of $3.0 billion, up 56.5% YoY.
Despite the unprecedented growth, MercadoLibre is not resting on its laurels. The company continues to invest in its e-commerce proposition and logistics network. It has increased the assortment of products and improved its service and price levels. It is also creating new business lines to expand its offerings and retain customers. For instance, its fintech business is gaining momentum reaching over 44 million users in the last quarter of 2022.
Typically, growth stocks don’t emphasize profitability, but MercadoLibre is doing so. Accompanying the 49% revenue growth in 2022, it more than doubled its operating income from $441 million to $1.034 billion. Despite the higher forward P/E of 54, MercadoLibre represents a favorable risk-reward skew. Its online marketplace, logistics network and fintech capabilities will continue to provide value for Latin American consumers fueling growth in 2023.
Retail Stocks to Buy: Dollar General (DG)
Historically, dollar stores have performed well during recessions. Usually, constrained consumers turn to these stores for value items. Dollar General (NYSE:DG) is the best-in-class in this segment. It is the largest discount retailer in the U.S., with over 19,147 stores in 49 U.S. states and Mexico. The company adopts a differentiated strategy, targeting towns with less than 20,000 people where e-commerce operations are not viable. I’ll be the first to admit that there are more exciting businesses than Dollar General. It sells everyday products like snacks, food, beauty and health aids in small-box stores. But its business model allows it to navigate economic cycles seamlessly, making it one of the best retail stocks to buy in 2023. Consumables represent almost 80% of its revenues, making it immune to recessions. After all, consumers still need low-priced necessities even in a downturn.
While execution challenges have been an issue at its peer Dollar Tree (NASDAQ:DLTR), Dollar General has grown from strength to strength. For 31 consecutive years, from 1990 to 2020, the company achieved positive same-store sales. This includes the tumultuous Great Financial Crisis (GFC) period, a testament to the strength of the business. Although the company didn’t grow same-store sales in 2021 after the abnormal lockdown-induced withering of 2020, it returned to growth in 2022.
Management is still banking on its compelling value and convenience proposition to grow. Besides, it’s implementing other strategic growth initiatives like expanding into Mexico, new store concepts and adding new offerings to its stores. The stock is attractive at a forward P/E of 17 and a dividend yield of 1.05%. So far, the company has grown its dividend for five consecutive years. If economic conditions deteriorate, more consumers will turn to Dollar General for its everyday low prices.
On the date of publication, Charles Munyi 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.