The U.S. economy contracted by 5% in the first quarter. That was slightly larger than the 4.8 decline that was previously forecast. On the same day that GDP was released, we also learned that the ranks of those filing for unemployment claims exceeded 40 million.
But as sobering as those numbers are, they’re not completely surprising. The U.S. economy was effectively shut down as citizens did their part to slow the spread of the novel coronavirus. But the cost of those efforts is just being measured.
And one of those measurements comes in the all-important Consumer Confidence Index. The index ticked up slightly in May to 86.6. While this number is about 30% lower than where the index sat In February, it’s significantly higher than where it sat at the trough of the financial crisis and subsequent recession.
And a big reason for that is that while the brick-and-mortar economy shut down, the digital economy helped give the economy a pulse.
Consumption is a key part of our economy. That’s why consumer confidence makes up 70% of the U.S. economy. And one of the key ways that consumers express that confidence or lack thereof, is in the retail sector.
For the last few years, the story of retail has been about which retailers were going to be able to successfully compete in the e-commerce space that is still owned by Amazon (NASDAQ:AMZN). Sadly, we’re discovering that some companies, like J.C. Penney, were late to adapt in a meaningful way. But that isn’t the case for all retailers.
In this special presentation, we are identifying 7 retail stocks that have done well through this turbulent time and should use that as a springboard to continued growth.
Quick Links
- Walmart
- Tractor Supply Company
- TJX Companies
- Ross Stores
- Burlington Stores
- Dollar General
- Costco
#1 - Walmart (NYSE:WMT)
Perhaps no brick-and-mortar retailer has benefited more from the Covid-19 pandemic than Walmart (NYSE:WMT). WMT stock is up over 5%. The sheltering-in-place orders that locked down many Americans was an ideal opportunity for Walmart to put to the test both its curbside pickup option as well as the strength of its digital footprint.
In the fiscal first-quarter (ending April 30), online sales increased 74%. Same-store sales in the United States were up 10%. Walmart’s network of 5,000 physical stores was essential in helping consumers get the supplies they needed to stay at home. But the company also benefited from the consumers who used their $1,200 stimulus check to purchase bigger ticket items like televisions and other electronics.
And Walmart accomplished this in the face of increased inventory costs as well as cash bonuses to workers and a $2 hourly wage increase to warehouse employees. The company pulled its full-year guidance, but that’s not alarming in this environment. As the kids would say, “everyone is doing it.”
A bearish argument is that Walmart was “only” up 5% at a time when it should have had a captive audience. What will happen when consumers are free to buy more than just essential items? The answer is likely to be, they’ll continue to shop at Walmart.
About Walmart
Walmart Inc engages in the operation of retail, wholesale, other units, and eCommerce worldwide. The company operates through three segments: Walmart U.S., Walmart International, and Sam's Club. It operates supercenters, supermarkets, hypermarkets, warehouse clubs, cash and carry stores, and discount stores under Walmart and Walmart Neighborhood Market brands; membership-only warehouse clubs; ecommerce websites, such as walmart.com.mx, walmart.ca, flipkart.com, PhonePe and other sites; and mobile commerce applications.
Read More - Current Price
- $69.79
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 27 Buy Ratings, 3 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $71.60 (2.6% Upside)
#2 - Tractor Supply Company (NASDAQ:TSCO)
It seems that millions of Americans decided that getting a jump on their planting and landscaping was a productive activity to do while staying at home. It also appears that a global pandemic that is putting out rumors of food shortages is an incentive for Americans to plant gardens again. Both of these have been a catalyst for Tractor Supply Company (NASDAQ:TSCO).
Tractor Supply recently told analysts it is forecasting record-breaking numbers on both the top and bottom lines during its current quarter. The company also expects to see a 20% to 25% growth in comparable-store sales. This is music to investors ears as TSCO stock is up nearly 50% since the nationwide lockdowns began. As of this writing, the stock has the largest gain of any retail stock in the S&P 500.
The downside to this story is that Tractor Supply’s success is likely coming at the expense of local nurseries that may or may not have been deemed essential during the pandemic. As these businesses reopen (assuming they reopen) Tractor Supply’s rate of growth is likely to slow down. But habits can be hard to break. Consumers have become comfortable buying online and Tractor Supply reports an increase in online sales since the lockdowns began.
About Tractor Supply
Tractor Supply Company operates as a rural lifestyle retailer in the United States. The company offers various merchandise, including livestock and equine feed and equipment, poultry, fencing, and sprayers and chemicals; food, treats, and equipment for dogs, cats, and other small animals, as well as dog wellness products; seasonal and recreation products comprising tractors and riders, lawn and garden, bird feeding, power equipment, and other recreational products; truck, tool, and hardware products, such as truck accessories, trailers, generators, lubricants, batteries, and hardware and tools; and clothing, gift, and décor products consist of clothing, footwear, toys, snacks, and decorative merchandise.
Read More - Current Price
- $262.52
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 14 Buy Ratings, 8 Hold Ratings, 2 Sell Ratings.
- Consensus Price Target
- $256.58 (2.3% Downside)
#3 - TJX Companies (NYSE:TJX)
TJX Companies (NYSE:TJX) is the parent company for multiple retail chains including TJ Maxx. TJX may seem like an odd candidate for a virus-resistant stock. After all, the company shuttered both its physical and its online stores for two weeks in March. Plus the company took the always difficult step of suspending its quarterly dividend.
But that’s where much of the bad news ends. TJX is one of the largest “off-price” retailer as well as one of the few retailers to be adding retail space in recent years. Its off-price business model is particularly evident in its TJ Maxx brand. TJ Maxx attracts a loyal consumer base that visit the stores looking for discounted treasures.
Since the chain started to reopen its stores on May 2, sales are increasing on a year-over-year basis. This is significant because the TJ Maxx business model relies on fast turnover of discounted merchandise. In fact, as opposed to some retailers that only turnover inventory twice a year, TJ Maxx turns over their inventory 11 times per year.
And that means it needs consumers coming into stores. So if sales are increasing it is anecdotal evidence that consumers are perhaps less reluctant to shop in physical stores than previously thought.
About TJX Companies
The TJX Companies, Inc, together with its subsidiaries, operates as an off-price apparel and home fashions retailer in the United States, Canada, Europe, and Australia. It operates through four segments: Marmaxx, HomeGoods, TJX Canada, and TJX International. The company sells family apparel, including footwear and accessories; home fashions, such as home basics, furniture, rugs, lighting products, giftware, soft home products, decorative accessories, tabletop, and cookware, as well as expanded pet, and gourmet food departments; jewelry and accessories; and other merchandise.
Read More - Current Price
- $111.83
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 15 Buy Ratings, 2 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $112.67 (0.7% Upside)
#4 - Ross Stores (NASDAQ:ROST)
Another major player in the off-price retail space is Ross Stores (NASDAQ:ROST). The company had earnings that lagged behind the industry leader TJX. However, like most retailers that was an expected outcome. The company also declined to post forward guidance.
One of the negatives in the company’s report was a negative $1.1 billion in cash flow from operations. This was largely due to the fact that the company continued to pay for merchandise even as stores were closed.
Ross Stores began opening about two weeks after TJX stores. As of this writing only about 700 stores have re-opened. ROST has a model that is similar, but distinct, from a store like TJ Maxx. Both stores rely on heavily discounted merchandise. However, Ross Stores offer a less seasonal variety that gives their inventory a bit more shelf life. If TJX stores are any barometer, the company should expect to have encouraging store traffic that may translate into sales.
About Ross Stores
Ross Stores, Inc, together with its subsidiaries, operates off-price retail apparel and home fashion stores under the Ross Dress for Less and dd's DISCOUNTS brand names in the United States. Its stores primarily offer apparel, accessories, footwear, and home fashions. The company's Ross Dress for Less stores sell its products at department and specialty stores to middle income households; and dd's DISCOUNTS stores sell its products at department and discount stores for households with moderate income.
Read More - Current Price
- $140.91
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 14 Buy Ratings, 3 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $159.06 (12.9% Upside)
#5 - Burlington Stores (NYSE:BURL)
Closing out our trilogy of off-price retailers is Burlington Stores (NYSE:BURL). The retailer reported worse than expected earnings and revenue on May 28. A significant reason for the larger than expected negative earnings number ($4.76 as opposed to $1.61) was a one-time $272 million charge. The company is absorbing the cost of anticipated markdowns.
However, the stock is recovering as many investors, it seems, are realizing that Burlington’s story is much the same as TJX and ROST. It closed all of its physical stores and is now in the slow process of reopening them. And, similar to other off-price retailers, Burlington is seeing a level of sales that are exceeding the level of previous years.
Like its competition, Burlington is not a significant player in the e-commerce space. According to management only about 0.5% of the company’s sales are online. This reflects the nature of the company’s merchandise which consumers typically want to see and touch before buying. However, this is the same story for its competitors so it’s not really a disadvantage at this time.
A more significant headwind is Burlington’s lack of a dividend. However, if the company continues to see sales grow as it continues to open its stores, Burlington still has room to run in 2020.
About Burlington Stores
Burlington Stores, Inc operates as a retailer of branded merchandise in the United States. The company provides fashion-focused merchandise, including women's ready-to-wear apparel, menswear, youth apparel, footwear, accessories, toys, gifts, and coats, as well as baby, home, and beauty products.
Read More - Current Price
- $249.78
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 12 Buy Ratings, 3 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $248.80 (0.4% Downside)
#6 - Dollar General (NYSE:DG)
Dollar General (NYSE:DG) is to the budget-minded consumer what Costco is to the higher earners. It’s a store of value. The idea of a dollar store is a bit misleading because Dollar General is having success moving into some “reach up” price points.
Dollar General has grown fast. It now has a nationwide footprint of over 16,000 stores. It was hiring throughout the pandemic. Investors have been pushing the stock to all-time highs. At the same time, Dollar General has continued to beat forecasts for earnings and revenue.
On May 28, the company reported earnings per share (EPS) of $2.52 that blew away analysts’ expectations for $1.68 EPS. The company also generated higher-than-expected revenue of $8.45 billion. And in the all-important comparable-store sales, Dollar General posted a year-over-year increase of over 21%.
The company’s expansion and elevated stock price is reflected in its dividend yield that now sits below 1%. However, Dollar General has posted four consecutive years of dividend growth. And since it only pays out just above 20% of its trailing 12-month earnings to cover its dividend, the dividend is very safe.
About Dollar General
Dollar General Corporation, a discount retailer, provides various merchandise products in the southern, southwestern, midwestern, and eastern United States. It offers consumable products, including paper and cleaning products, such as paper towels, bath tissues, paper dinnerware, trash and storage bags, disinfectants, and laundry products; packaged food comprising cereals, pasta, canned soups, fruits and vegetables, condiments, spices, sugar, and flour; and perishables that include milk, eggs, bread, refrigerated and frozen food, beer, and wine.
Read More - Current Price
- $118.09
- Consensus Rating
- Hold
- Ratings Breakdown
- 9 Buy Ratings, 11 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $147.86 (25.2% Upside)
#7 - Costco (NASDAQ:COST)
Costco Wholesale’s (NASDAQ:COST) message to warehouse club members during the pandemic could easily have been “go big then go home.” It would seem many Americans took the company’s advice. Like Walmart, COST stock is up about 5%. Costco, predictably, saw a spike in sales. The warehouse model encourages consumers to buy bulk quantities of everyday essentials such as toilet paper, paper towels and personal hygiene items.
It’s also predictable that as the lockdown restrictions began to ease, Costco would say another increase in sales as consumers resupplied their homes. This leads to a bigger question of whether the company will report slower sales in the months. I don’t think so for two reasons.
First, there is no social consensus on reopening the economy. The simple fact is many Americans that have the ability to do so will opt out of participating in the economy until they feel there are effective treatments and or a vaccine. And second, the Costco consumer has a higher average income so not only will they likely be less affected by a recession, but they will have more disposable income to spend.
And even though Costco requires consumers to pay an annual membership fee, the company retains nearly 90% of its consumers. And it’s not hard to see why. Costco provides a great value for some of those everyday items. Essentially the consumer is buying goods at cost so there’s little need to comparison shop.
About Costco Wholesale
Costco Wholesale Corporation, together with its subsidiaries, engages in the operation of membership warehouses in the United States, Puerto Rico, Canada, Mexico, Japan, the United Kingdom, Korea, Australia, Taiwan, China, Spain, France, Iceland, New Zealand, and Sweden. The company offers branded and private-label products in a range of merchandise categories.
Read More - Current Price
- $817.60
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 20 Buy Ratings, 7 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $799.33 (2.2% Downside)
With all the talk of a new normal, it’s not insignificant to mention that retail continued to do business throughout the lockdown. Although brick-and-mortar stores were closed, e-commerce thrived. E-commerce sales increased 10.8% in April after a 6% increase in March. This was evident that consumers who had the means to shop were still shopping.
As stores begin to reopen, it is these customers that retailers will be counting on to help lead the economy back. Although consumer confidence is down, it is still well above the levels reached during the great recession. This suggests that consumers have an appetite for spending. And by the early look of it, that may not just be e-commerce. Customers are coming back to brick-and-mortar stores.
There are many unanswered questions about the speed of this recovery. The next several quarters will continue to present uncertainty as the nation gets back to business. However, these companies have business models that will allow them to be catalysts in the reopening. And whether by-product offering or demographic, these customers have enough differentiation that should insulate them from overlapping sales.
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