Christmas Shopping has Begun!
With the holiday season quickly approaching, investors are looking closely at retail stocks. Which ones should you buy and sell?
The holiday shopping season is about to pick up steam with Thanksgiving and Black Friday shopping specials right around the corner. As we approach the holiday season, now is the perfect time to start putting together your retail stock shopping list.
Retail companies sell goods in large quantities, which they typically source from manufacturers or wholesalers and then sell these goods directly to consumers in smaller quantities. Most sales take place through online channels or retail storefronts. Because consumer spending influences the health of the retail industry it is critically important to have a good understanding of the broader economy and which retailers are having success in the current environment.
The retail industry can be a great sector for investors who like to do their homework. There are many opportunities and challenges in this sector so it helps to separate the wheat from the chaff. Looking global, the U.S. is a leader in the retail business.
The United States provides a host of retail services ranging from auto dealers and convenience stores to clothing shops and online retailers. Retail sales represent approximately 30% of consumer spending making it one of the key features of the U.S. economy.
Take a look at how the S&P Retail Index has done since 2009:
A Look at the Current Economy
In 2013, the economic recovery has been in full force with the S&P500 and Dow Jones leading the charge to new highs. The markets are leading economic indicators showing where investors believe the economy is heading.
With the Federal Reserve maintaining its stimulus program this has helped improve consumer confidence and spending and given a huge boost to the markets. The $85 million a month program has to eventually end, but we still do not have a clear timeline. Many market pundits are now expecting the Fed to easing at some level through at least April 2014.
As the economy, stock market, and housing markets have come roaring back, consumer spending has been a mixed bag with certain retailers have far better results than others. Consumer confidence recently took a bit of a hit with the recent government shutdown. The Conference Board’s Consumer Confidence Index fell to 71.2 in Oct 2013, which was down substantially from September’s 80.2 reading. If this downtrend continues this could spell trouble for retailers.
One important measure to look for with retail
One of the most important measures with retail is comparable store sales because this takes out new and closed stores. This allows investors to compare one period versus another, the essential apples to apples comparison.
Some recent highlights:
- L Brands Inc. (NYSE: LTD), a woman’s apparel, beauty and personal care
products company, showed an industry leading 8% rise in comparable-store sales.
- Drug store, Walgreen Co. (NYSE: WAG) showed an impressive 5.8% rise in comps and a 6.1% increase in comparable-store sales.
- Clothing company, The Gap Inc. (NYSE: GPS) posted a healthy 4% rise in comparable-store sales
However, some of the discount retailers like Wal-Mart, Zumiez Inc., and Fred’s, Inc. have seen minimal growth. The U.S. retail and food services sales data for September 2013 was also disappointing as retail and food services sales fell 1%.
Keeping up with consumer trends
Consumer buying trends are rapidly evolving. It is becoming more challenging for retailers to grab buyers’ attention and create brand loyalty. Attracting and retaining customers requires a whole new host of strategies. The retailers who connect best their customers stand the best chance for repeat purchases.
To offset relatively soft demand for many retail services, many retailers have tried to maintain their edge through innovative products design, deep discounts, free shipping and handling, and a host of other promotions such as Groupon deals and online coupons.
In order to really make a dent with consumers, the top of industry retailers will need to deploy more technological solutions, solicit customer feedback and develop strategies to target their ideal customers. The growth of online shopping will allow retailers to adopt specific web, smart phone, and tablet strategies to increase sales. This could allow many U.S. retail chains to trim their number of physical retail locations and place more emphasis on online channels.
The retailers who are having the most success within their respective industries are the ones getting to know their customers better and looking for ways to service those customers. Those retailers using data and analytics to better understand their consumers are being rewarded with higher growth.
Challenges in the Retail Industry
Because the industry is so competitive it makes the industry more susceptible to challenges going forward. Here are a few to watch for:
- Strong exposure to the global economy: A downturn in the economy could bring retail growth to screeching halt. Retail is highly dependent on the overall economy and economic factors like job growth, interest rates, and consumer spending can negatively impact retail sales.
- Ever-changing consumer preferences: Consumers needs, tastes, and attitudes can be a moving target. What is popular today can change in a heartbeat. For example, during the recent economic downturn, consumers have become much more budget conscious often focusing on seeking a greater value. Many have switched to generic brands, eating out less, and shopping around for lower prices.
- More competition online. Brick-and-mortar store formats have become less popular, but often consumers are going into retail stores to try merchandise then end up buying online at lower prices. This shift in purchasing can negatively impact many of the traditional brick-and-mortar stores who rely on volume.
The overall retail sector has seen impressive earnings growth thus far in 2013. In Q3 2013, total earnings for this sector increased 6.2% year over year. This reflects a 7.3% improvement over Q2 2013 as well. Revenues were also impressive with the sector boasting total revenue growth of 3.7% in the third quarter and a 4.2% jump in the second quarter of 2013.
So finding top ranked retail stocks is no easy challenge. In order to do so, I look at 5 different factors:
- Is the retailer in good financial shape?
- Is the company attractively valued?
- Has the stock price been trending up showing strong momentum?
- How risky is the company?
- Has it shown a positive earnings trend?
Based on these five factors, here are my top picks…
5 Retail Stocks Worth Buying:
- Nu Skin Enterprises Inc., (NYSE: NUS). This has been a top pick in our All-Weather Portfolio. Nu Skin Enterprises, Inc. is a direct selling company that develops and distributes premium-quality, innovative personal care and nutritional products. The company also markets and distributes technology, Internet and telecommunications services and products.
- Hanesbrands (NYSE: HBI). This is an innovative retailer from our Contrarian Strategies Portfolio. Hanesbrands Inc. is a leading marketer of innerwear, outerwear and hosiery apparel under strong consumer brands, including Hanes, Champion, Playtex, Bali, Just My Size, barely there and Wonderbra. The company designs, manufactures, sources and sells T-shirts, bras, panties, men’s underwear, children’s underwear, socks, hosiery, casual wear and active wear.
- Ulta Salon (NASDAQ: ULTA). This is also a part of our Contrarian Strategies Portfolio. ULTA is the largest beauty retailer that provides one-stop shopping for prestige, mass and salon products and salon services in the United States. ULTA provides affordable indulgence to its customers by combining the product breadth, value and convenience of a beauty superstore with the distinctive environment and experience of a specialty retailer.
- Tractor Supply Co. (NASDAQ: TSCO). This is one of my favorites in this economy. It is a part of our PACE Portfolio and our All-Weather Portfolio. Tractor Supply Company is a specialty retailer, which supplies the daily farming and maintenance needs of its target customers: hobby, part-time and full-time farmers and ranchers, as well as rural customers, contractors and tradesmen.
- Michael Kors Holdings Ltd (NASDAQ: KORS): I love luxury retail right now. Michael Kors is a global accessories, footwear and apparel company. They offer two primary collections: the Michael Kors luxury collection and the MICHAEL Michael Kors accessible luxury collection. They also offer select footwear and outerwear through their KORS Michael Kors accessible luxury collection. This stock is in our Dueling Duo Portfolio.
Based on my five financial criteria, here are the retail stocks that score the lowest…
5 Retailers Worth Selling:
- Barnes & Noble Inc. (NYSE: BKS): too much competition with online bookstores.
- Coach Inc. (NYSE: COH): the company’s popularity is waning and getting beat by Kors!
- RadioShack Corp. (NYSE: RSH). There are far too many competitors with lower pricing and better retail execution. This one is definitely a sell right now.
- Abercrombie & Fitch Co. (NYSE: ANF). This is having a rough year and I don’t expect holiday sales to help much. There are far better clothing plays like VF Corporation (NYSE: VFC).
- Perry Ellis (NASDAQ: PERY). This retailer is also have a rough year. I would avoid this one for now as its earnings, financial strength, valuation, and momentum scores are very low.
Bottom line: Select retailers should continue to outpace the market. This sector is very tricky and you should look for the cream of the crop in fast growing niches. Retailers are trying numerous strategies to remain competitive. Some are sacrificing short-term results in effort to turn around long-term prospects. The five companies I have selected as buys represent great companies with long-term growth appeal. Selecting strong companies like these could prove to be a wise investment decision.