Over the past year, there has been a stark underperformance from retail stocks. One reason is that many retailers expect flat to down sales this year. However, the best retail stocks to buy are successfully navigating these challenges and are well-positioned for a rebound.
Sales growth has moderated, particularly for discretionary retailers, as consumers shift to traveling and going out. Also, consumers are trading down, preferring cheaper private-label brands and focusing on food and household essentials to save costs. These challenges have weakened the sector, with the SPDR S&P Retail ETF (NYSEARCA:XRT) down 7% in the past year. But, there appears to be light at the end of the tunnel. Most retailers are getting back to normal inventory levels. And with the goods downturn bottoming, it might be an opportune time to consider the following leading retail stocks.
Target (TGT)
Over the first half of 2023, Target (NYSE:TGT) faced a blizzard of challenges. Its sales have slowed since its mix is highly tilted towards discretionary spending rather than grocery. As goods demand declined, the company faced a severe inventory problem. It had to discount to drive sales impacting margins. Then, in May, the company got significant backlash for its LGBTQ+ Pride merchandise. Due to the controversy, the stock fell 20% in a month. Consequently, its popularity has plummeted nationwide among shoppers. These problems have led to underperformance against discount store peers like Walmart (NYSE:WMT) and Costco (NASDAQ:COST). However, this has created a bargain, making it one of the must-buy retail stocks.
Already the company has worked off its inventory glut. In the first quarter, inventories were 16% lower than the previous year. Target has been one of the leading retail stocks and will recover. At these prices, shares present a bargain and a potential catch-up trade. It trades at a forward price-to-earnings of 13, while Walmart and Costco trade at 23 and 35 times forward EPS, respectively. As this gap closes, expect Target to outperform its peers.
Tractor Supply (TSCO)
This supermarket chain has a differentiated market compared to other top retail stocks for August. It focuses on the rural niche serving the farm and ranch industry. It sells everyday items such as livestock products and gardening tools.
While Tractor Supply (NASDAQ:TSCO) was a massive beneficiary of the pandemic, those advantages have waned and growth is decelerating. Moreover, margins are declining as inflation tailwinds moderate. Despite these near-term challenges, the retailer is in excellent shape.
Due to its unique market position, the company is still growing at a healthy pace. Recent second-quarter results highlighted that revenue growth was holding up. Revenues grew 7.2% year-over-year (YOY) to $4.18 billion. Also, comparable store sales rose 2.5%. From the report, it was apparent that U.S. spending on goods is moderating.
As of December 2022, Tractor Supply operated 2,333 retail stores and plans to increase this number to 3000. So, more growth lies ahead. At a forward P/E of 20, this specialty retailer is one of the top retail stocks for August.
Dollar General (DG)
Year-to-date, Dollar General (NYSE:DG) has declined 33%. After a series of disappointing results, the stock has fallen out of favor with the market. The stellar growth numbers during the pandemic are in the rear-view mirror. And the company is experiencing near-term challenges related to declining customer traffic and slowing sales in seasonal, home and apparel goods.
According to the New York Fed’s Household Debt and Credit Report, credit card balances rose by $45 billion in the second quarter to a record of $1.03 trillion. Evidently, consumers are exhausting their pandemic savings and becoming more financially stretched. Given the weakening consumer, Dollar General is one of the best retail stocks to buy. It targets the low to mid-income categories with its low-priced items. As budgets get stressed, consumers will trade down to dollar stores like Dollar General and peer Dollar Tree (NASDAQ:DLTR).
Luckily for investors, the stock is undervalued after two disappointing earnings. As a result, it’s trading at a discount forward P/E multiple of only 15.
The company will soon return to solid execution. So far, this year has been an investment year but expect its value and convenience proposition to pay off as low-income consumers face a challenging economic environment.
On the date of publication, Charles Munyi 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.
