The economy of the United States is primarily driven by consumption expenditure. A key part of consumption spending is retail sales. With inflation playing spoilsport along with relatively sluggish GDP growth, retail sales have been impacted. After accounting for inflation, retail sales are likely to decline by 0.1% for the year. Given the challenging outlook retail stocks have been negatively impacted and there are several undervalued retail stocks.
Of course, it’s too early to assume a sharp recovery in retail sales. However, the best time to buy is when sentiments are depressed and blue-chip stocks trade at a valuation gap. Once the retail sector witnessed recovery, these stocks are poised for high total returns.
It’s worth noting that inflation has been easing and that’s positive for the retail sector. Further, retail companies continue to invest in store remodeling, product diversification, and better consumer experience. Operational efficiency during this downturn for the sector will translate into margin expansion in the coming years.
Let’s talk about three undervalued retail stocks that are worth considering.
Target Corporation (TGT)
Target Corporation (NYSE:TGT) has remained weak with a downward bias in the last 12 months. From a valuation perspective, TGT stock looks attractive at a forward price-earnings ratio of 16.2. Additionally, the stock has a healthy dividend yield of 3.3%.
Of course, there are concerns related to discretionary consumer spending. It however seems to be discounted in the stock. Further, with easing inflation, the coming quarters can deliver some positive surprises.
I also believe that Target is attractive from a long-term perspective. Earlier this year, the company announced $4 to $5 billion in strategic investment that’s focused on fueling growth.
The investments related to the expansion of the own brand, catering to deal-conscious shoppers, and expansion and remodeling of stores. Once there is a healthy revival in consumer spending, the investments will yield results in the form of comparable store sales growth and margin expansion.
The Home Depot (HD)
The Home Depot (NYSE:HD) is another name among undervalued retail stocks to buy. The stock has remained sideways in the last 12 months and currently trades at a forward price-earnings ratio of 21.3. A dividend yield of 2.63% is also attractive.
For 2023, Home Depot has guided for a comparable sales decline in the range of 2% to 5%. This factor is however discounted in the current valuation. The interesting point to note is that the company has provided guidance for a stable market scenario.
Home Depot expects 3% to 4% sales growth once the market stabilizes. Further, earnings per share growth is likely from mid-to-high-single-digit. Relatively strong growth in EPS is likely to be backed by operating leverage and productivity. Once there are early signs of comparable sales growth reversal, I expect HD stock to rally from undervalued levels.
Best Buy (BBY)
Best Buy (NYSE:BBY), a retailer of technology products in the United States and Canada seems deeply undervalued. BBY stock has largely remained sideways in the last 12 months. A breakout on the upside seems likely considering the point that the stock trades at a forward price-earnings ratio of 13.7. A robust dividend yield of 4.37% adds to the attractiveness.
For Q1 2024, Best Buy reported a sharp decline in domestic and international revenue. The company continues to expect weakness throughout the year and has guided for a comparable sales decline in the range of 3% to 6%.
While the market remains challenging, Best Buy has guided for capital expenditure of $850 million for the year. This underscores the company’s confidence in returning to growth once temporary headwinds wane.
It’s also worth noting that the company is expanding into newer categories that include “wellness technology, personal electric transportation, outdoor living, and electric car charging.” This is another factor that is likely to boost comparable store sales growth in the coming years.
On the date of publication, Faisal Humayun did not hold (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.
