As concerns about a slowdown in consumer spending rise, you may think now is not the right time to invest in the best retail stocks. However, with shares in retailers already hit hard by this uncertainty, many stocks in this sector have fallen to heavily-discounted valuations. For instance, there are many retailer stocks trading at single-digit price-to-earnings (or P/E) ratios right now. While some of them are set to experience a big dropoff in earnings, most of them can be better described as deep value rather than potential “value traps.”
Better yet, despite the fear, uncertainty, and doubt (or FUD) surrounding the macro picture, recent inflation and jobless claims data may suggest an increasing chance of a much-hoped “soft landing” for the U.S. economy playing out. This could pave the way for retailers to report much stronger earnings than currently anticipated. The resultant pleasant surprise in turn would likely mean outsized moves higher for names in the retailing space. With this in mind, some of all of these seven best retail stocks may make for great contrarian buys right now. A mix of large, small, and under-the-radar names, each one currently trades at a low valuation.
Best Retail Stocks: Build-A-Bear Workshop (BBW)
In recent years, Build-a-Bear Workshop (NYSE:BBW) has been on a tear. With the specialty retailer’s revenue and earnings making an epic comeback post-pandemic, rising above pre-Covid levels, its shares as a result have experienced a more than ten-fold increase in price since mid-2020. But even as some have remained skeptical that this strong performance will continue, so far the company has continued to crush it. Last quarter, the company reported record revenue and earnings, and provided promising full-year guidance.
The sell-side is also confident that the company will stay in growth mode. Forecasts call for earnings per share (or EPS) to rise 7.9% next fiscal year (ending January 2025). If a “soft landing happens,” and/or Build-a-Bear’s business stays resilient enough to enable it to keep meeting expectations, a re-rating may be in store for BBW stock (cheap at 7.6 times forward earnings).
As with BBW, a strong track record and low valuation make Dillard’s (NYSE:DDS) one of the best retail stocks. As I discussed late last month, while the department store stock’s multi-year hot run kicked off due to a short-squeeze, subsequent waves have been fueled by improving fundamentals.
Yes, the company has been somewhat hit by the latest macro challenges. As seen in recent results, revenue and earnings have declined year-over-year. However, one can argue that this slowdown is already baked into the valuation of DDS stock. Shares trade for just 7.7 times forward earnings. Don’t get me wrong. I don’t expect DDS to repeat some of the parabolic moves the stock made during 2021 and 2022. However, if earnings declines are moderate at worst, and this family-run business continues to aggressively repurchase shares, the stock likely has additional room to run in the years ahead.
Dollar General (DG)
As a discount retailer, one would assume that Dollar General (NYSE:DG) shares should in theory perform well during a time of economic challenges, but those who have held the stock know this not to be true in actuality. That is, DG stock has dropped by nearly 50% over the past twelve months. As I recently discussed, there is good reason for this. In the past year, inflation has put the squeeze on margins. The company a few month back also provided horrendous guidance for the coming quarters.
So, with these issues, why buy DG? With inflation cooling, the chances that the company does begin to experience a rebound in earnings next fiscal year are getting stronger. If earnings begin bouncing back, this retail stock (trading for 15.5 times earnings, at the low end of its historic valuation range) may be able to jumpstart a rebound as well.
Hibbett (NASDAQ:HIBB) is a retailer of athletic wear and sporting goods, primary in the Southern U.S. Prior to 2021, HIBB was somewhat of a hidden gem, but that year (much like with other sportings goods stocks), a post-pandemic surge in sales fueled a big run for this former under-the-radar name.
However, HIBB stock has since given back most of these gains, and has returned to under-the-radar status. At least, with the long side of the trade. The short side remains very crowded. According to Fintel, 14.8% of HIBB’s outstanding float has been sold short. Even so, these shorts may come to regret betting against Hibbett. The prospect of softening demand already appeared priced-in, given that HIBB trades for only 6.2 times earnings. If results improve in the coming quarters, who knows, HIBB could come off the market back burner, as a short-squeeze play.
Haverty Furniture Companies (HVT)
Haverty Furniture Companies (NYSE:HVT), as its name may suggest, is a retailer of residential furniture. Shares took a dive during most of 2022, but since last fall, have made a moderate move higher, as the market keeps waiting for the other shoe to drop with a recession, or worse, a housing crash.
Yet if your take on where the U.S. economy from here is contrary to that of the doom-and-gloom crowd, HVT stock is another strong choice among retailers. Haverty’s is cash-rich, with a $109.1 million war chest against a $493 million market cap.
If the economy worsens, the company may be able to absorb possible operating losses, and ride things out. At the same time, if there is a soft landing for the economy and for housing, this cheap stock (forward multiple of 8.2) may have room to rally significantly above current prices.
MarineMax (NYSE:HZO) is America’s largest recreational boat and yacht dealer. Not exactly the type of business you want to own in a downturn/possible recession, right? Well, not necessarily. Admittedly, it’s not the best of times for Marinemax right now.
Although the company in July reported strong results for the June quarter, given that, lately, boat manufacturers like Mastercraft (NASDAQ:MCFT) have slashed guidance, the coming quarters may not be so stellar. This may explain why HZO stock has sunk back lower, after experiencing a post-earnings surge.
Still, shares may be back in the buy zone. Why? Trading for 6 times earnings, this is yet another retailer stock where uncertainty has been factored in heavily. Even the mere reporting of “less bad” results (forecasts call for earnings to drop 12.5% next fiscal year) may be enough to spark a relief rally for this “bottom-fisher’s buy.”
As my InvestorPlace colleague Joel Baglole recently argued, Macy’s (NYSE:M) is one of the best retail stocks, if you’re looking to wager on a soft landing. Given the department store retailer’s resilience thus far (in terms of operating performance), it may be well-positioned to report the sorts of “less bad” results that could catapult the stock back to higher prices.
However, that’s not the only reason to like M stock right now. Not only do shares trade at a forward earnings multiple (4.1) well-within deep value territory. The stock trades at a 23% discount to its book value as well, thanks to the underlying value of its owned real estate. Analysts and commentators have thrown up a wide range of estimated valuations for the Macy’s real estate portfolio, but even more conservative estimates ($6 billion-$8 billion) exceed the company’s market cap ($3.2 billion).
On the date of publication, Thomas Niel 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.