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10 Best Retail Stocks To Buy Now

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Jose Karlo Mari Tottoc
·14 min read
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In this article we discuss 10 best retail stocks to buy now. You can skip our discussion about the growth catalysts for retail stocks, future of the retail industry and consumer habits and click to read 5 Best Retail Stocks To Buy Now.

Retail is one of the most dynamic industries in the world, with constant state of flux, changing consumer trends and major shifts in business dynamics. Traditional retailers that were already in shock from the “Amazon Effect” — the rising trend of online shopping and falling foot traffic to physical stores — were crushed in 2020 after the coronavirus crisis, as stores shuttered and people restricted their movement. The year saw several major and iconic retailers going bankrupt, including Neiman Marcus, J.C. Penney, Ascena Retail Group and Tailored Brands. These retailers have now joined the already-bankrupt giants from the past like Sears, Toys R Us and Circuit City.

Room For Growth

But not all is bad for the retail industry. In fact the industry is poised to continue its growth. The only variables are consumer behavior, logistics, supply-chain dynamics and delivery. According to a report by Center for Retail Research, total retail sales are expected to grow by 2.4% in 2021 as compared to 2020. In October 2020, Moody’s changed its outlook for the U.S. retail industry to stable from negative. The firm believes that operating profits in the industry will rebound over the next 12-18 months.

The 80-20 Rule

Moody’s however warned that store closures will continue in the country as shopping habits are changing. This sheds light on the fact that the “80-20” principle is extremely relevant and applicable to the retail industry. Few companies that have strong e-commerce channels are taking massive chunks of consumers’ money, while traditional retailers who relied solely on physical stores are struggling to sustain their businesses. This division will continue to expand, and only the retailers with strong logistics, e-commerce presence and value will survive.

The Future of Retail: What to Expect

Here are the 3 things that were identified to be foundational to the future of physical retail as per Brookfield Insights.

1. Focusing on high-quality real estate.

High-quality retail real estate is best positioned to meet the demand for spaces that serve a wider range of needs. Transforming properties into 'hubs' of commerce and daily life will make these assets viable for the long term.

2. Transitioning to "One Channel" Strategies

The pandemic accelerated the trend on the "omnichannel" because it provides the consumer with a relevant, stable, and individualized experience across both digital and physical assets, to allow for seamless brand engagement.

3. Harnessing the "Halo Effect"

Physical stores continue to be valuable profit takers. An overall incremental sales of 26% have been rewarded to investors that have invested with these concrete businesses.

Quality of Real Estate Matters

The quality of the environment and real estate matters for retailers.

Nearly 57% of store closures year to date have been attributed to brands that were financially challenged prior to the pandemic. Developing and redeveloping high-quality retail centers will be a key factor in the retail industry's future.

For instance, despite having a 24 square feet Gross Leasable Retail Area(GLA) that is 50% more than Canada's, U.S. retail sales were only 1/3 larger than Canada because of having a relatively 'high share' of 'lower quality' real estate.

Data from Green Street Advisors as of April 2020 suggest that low-quality(C-rated) malls comprise 22% of total U.S. GLA but account for just 11% of retail sales, while A-rated properties account for 58% of overall sales but represent only 36% of mall GLA.

Despite the Government-mandated economic shutdown, 'high-quality' shopping centers occupied by the most desirable brands continue to serve as a strong platform for customer acquisition, overall sales growth, and order fulfillment.

Around 40% more sales were delivered by 'A-rated' regional shopping centers in a 3-month period on average. Mall shoppers come primed and ready to buy rather than browse which gave brands with a shopping mall presence greater exposure for customer acquisition and also benefit from higher sales volume due to consumers' mission-based trips.

While the traditional model may not currently be working, skilled owners and developers must essentially be focusing on this silver bullet: Focusing your efforts on serving the community.

The properties that will come out on top are those that focus on carefully selecting a compelling, modern mix of merchants that is less focused on traditional retail.

Overall, we can see the future of retail to be 'bifurcating' along quality lines in the years ahead.

10 Best Retail Stocks To Buy Now
10 Best Retail Stocks To Buy Now

Sorbis / Shutterstock.com

Case Study: How the Redevelopment of Oakbrook Center Spurred Growth in Sales and NOI

Oakbrook Center is the 'Premier Shopping Destination' for Chicago's Affluent Western Suburbs. Brookfield has invested around $300 million in a major multi-phase redevelopment of the asset since 2012. The plan elevated the center's merchandising differentiation, and included:

-A revitalization area, including modern amenities with water features and landscaping, as well as a community gathering space.

-Conversions to increase retail productivity and create areas for dining and fitness uses.

-An expansion for a new AMC IMAX theater and food hall.

The redevelopment resulted in a total sales volume increase of approximately 40% since 2012 and Net Operating Income(NOI) has grown by about $30 million, reflecting an approximate 10% yield on invested capital. This implies a value creation of $350 million in excess of our investment.

The retail industry coined the term “omnichannel” to describe the integration of the e-commerce business back into the overall corporate operations of a retailer in the early 2000s. "One Channel" is the modern term used by the industry today. A strong One Channel operator can maintain a consistent look, feel, and voice across its marketing messaging, branding, and product assortment in all locations where the consumer may encounter it.

The challenge among many retailers for years is the transition to a 'One Channel' strategy. The pandemic was able to accelerate the timeline for them to either get on board or be left behind.

More customers have been demanding access and flexibility to obtain the products and services they need. The new standard baseline for fulfillment options includes “Buy Online, Pickup In-Store” (BOPIS) and curbside pickup, which have doubled in usage and have generated proven results since the pandemic.

A 40% increase in digital sales was achieved by Dick's Sporting Goods during the 1st quarter of 2020 using the BOPIS strategy. BOPIS is the fastest-growing and best-margin One Channel distribution capability for retailers.

Retailers need to execute fulfillment services to capitalize on their biggest sales during the holiday season, where e-commerce sales increase, shipping capacity increase and order fulfillment become constrained.

In fact, 62% of Americans who used BOPIS for the first time, plan to continue using it even after the pandemic. Owners of high-quality retail real estate will need to partner with retailers to optimize the operations of their physical locations into centralized hubs focused on the discovery, fulfillment, and returns.

In our experience, savvy retailers have recognized the benefits of physical retail within a One Channel strategy. Lululemon for example, connects with its customers through community events and in-store fitness classes, facilitating e-commerce transactions through the online registration process and generating awareness on social media.

As retailers adopt One Channel, some are finding new ways to use physical locations to strengthen their relationships with customers. Whole Foods Market is testing a dark-store concept in Brooklyn, New York, where 'only online orders' are fulfilled and to be an event space to host large-scale events such as runway shows. Pietro Beccari, Chairman and CEO of Christian Dior said, "brick and mortar will have capital importance for luxury brands such as Dior ".

The HALO Effect: Physical Retail is the Money-Maker

Physical stores are workhorses that benefit brands in profitable ways. Physical retail sales had been increasing 2% per year since 2016 and accounted for almost 80% of all retail sales. Combined with non-store sales, this resulted in an overall retail growth rate of 3.4% annually.

Online retail sites saw an 88% increase in traffic when most physical retail stores were closed around the world. Winners during the 'pandemic demand surge' were retailers that had large physical footprints, such as Walmart, Best Buy, and Target.

The scale of physical in-store sales versus digital e-commerce sales became abundantly clear. Digital growth of $6.7 billion could not come close to offsetting the $44.3 billion lost in physical retail stores.

A successful online strategy requires a successful 'brick-and-mortar' strategy. Amazon had been aggressively expanding into physical retail pre-Covid, as seen by the accelerated rollout of its specialty stores like Amazon 4-star, as well as grocery and distribution hubs. Amazon continues to look to build a network close to its target markets to compete with Walmart and Target.

Published by the International Council of Shopping Centers (ICSC) last 2018, the "halo effect" is the incremental e-commerce sales lift that occurs upon a store opening in a market with appropriate consumer demand.

By driving customer awareness of a brand, and by allowing consumers to touch and feel previously online-only products, retail stores play a vital role in the sales funnel that digital-only retailers cannot match.

Put simply, retail stores are the most effective customer-acquisition tools that digital-native brands can invest in.

Looking to the Future

Healthy retailers remain committed to their plans to open stores this year, with over 3,000 new stores having already opened year to date. The benefit of a community and a center working together is mutual because it drives improvements for both, ensuring long-term relevance and helping future-proof the industry.

With this context and expectations for the future in mind, let's take a look at the 10 best retail stocks to buy now. We chose only those retail stocks which have a strong online presence, robust growth catalysts and a positive hedge fund sentiment.

10. Overstock.com Inc (NASDAQ: OSTK)

OSTK ranks 10th in our list of the best retail stocks to buy. Internet retailer Overstock sells furniture, home decor, bedding and related merchandise. The stock has gained a whopping 931% over the last 12 months. Once marred by scandals and leadership problems, the company is thriving under the new CEO Jonathan E. Johnson, who recently said he has no interest in selling the ecommerce business. Overstock retail sales more than doubled in the second quarter as demand soared during the coronavirus pandemic. (Read: Is OSKT a Good Stock To Buy Now According to Hedge Funds?)

As of the end of the third quarter, 22 hedge funds tracked by Insider Monkey reported owning shares of Overstock.

9. Wayfair Inc (NYSE: W)

Formerly known as CSN Stores, Wayfair Inc. now sells furniture and home-goods on its digital platform and physical stores. Wayfair is the market leader in online furniture sales, beating major players including Amazon. The company has a market share of 33.4% of online furniture sales, according to 1010data. Gordon Haskett analyst Chuck Grom said in a report that Wayfair saw a 141% growth in checkout domain in January, compared to 93% in December.

Zachary Sternberg and Benjamin Stein’s Spruce House Investment Management is one of the 40 hedge funds tracked by Insider Monkey who reported having stakes in Wayfair at the end of the third quarter.

Artisan Mid Cap Fund said the following about Wayfair in its Q1 2020 Investor Letter:

“Revenue growth has slowed dramatically for Wayfair over the last year, in part due to rising trade tariffs. Meanwhile the company has been dramatically expanding headcount as well as its advertising and logistics spend, resulting in increasing losses and pushing out our margin expansion thesis. Given our lack of visibility into when these headwinds may abate, we decided to exit our position.”

8. Chewy Inc (NYSE: CHWY)

CHWY ranks 8th in our list of the best retail stocks to buy now. Florida-based Chewy is an online retailer of pet food and other pet-related products. The company was bought by PetSmart for $3.35 billion in 2017. The company went public in 2019, raising $1 billion from the stock sale. In December 2020, Needham gave bullish comments for Chewy. The firm said that Chewy has built a durable and scalable model that should benefit from secular trends in the near future.

The stock is up 259% over the last 12 months.

As of the end of the third quarter, 46 hedge funds tracked by Insider Monkey were bullish on the company.

Nelson Roberts Investment Advisors said the following about Chewy stock in its Q3 Investor Letter:

“In the consumer discretionary sector, we bought a position in Chewy (NYSE: CHWY). Chewy is the largest pet “e-tailer” in the world, offering the speed and convenience of e-commerce with the personalized service of a neighborhood pet store. The growing humanization of pets and focus on pets as family members has led to increased spending on pet care products and services. Chewy is benefiting from the pandemic, with record numbers of pets being adopted and people gravitating toward online shopping.”

7. Etsy Inc (NASDAQ: ETSY)

ETSY ranks 7th in our list of the best retail stocks to buy now. Etsy is a New York-based website focused on handmade and vintage items, including jewelry, bags, clothing, home décor and furniture, toys, art and tools. The stock rallied in January after Elon Musk tweeted, “I kinda love Etsy.” Loop Capital recently increased its price target for Etsy to $210 from $165.

Etsy is also getting love from the smart money, as 51 hedge funds ended the third quarter with Etsy on their portfolios, compared to 43 funds a quarter earlier. The total value of these stakes is $1.9 billion.

Madison Investments said the following about Etsy stock in its third-quarter letter:

“Over the past quarter we sold our position in marketplace company Etsy Inc. (ETSY). Readers of our letter may remember our discussion of ETSY from last year’s third quarter letter as a new position. ETSY was one of our most successful investments in recent memory, returning over 300% in less than one year. This is a salient example of a company whose fundamentals and asset price are benefitting from the unusual nature of the current recession that we have already discussed.

Etsy’s business model is rather simple. A scaled, global two-sided marketplace bringing together millions of buyers and sellers. Their platforms brings together a unique and fragmented base of artisans, artists, and unique item sellers (two million active sellers) with over 60 million of buyers (40 million active) in search of items that cannot be found in larger format retailers or online e-commerce platforms. This is a classic network effect business model where, as the marketplace grows, the economic moats widen. As the lockdown forced many of the artisans to rely more heavily on ETSY to drive their sales, consumers, with nowhere else to shop, went online to ETSY to shop for everything from handcrafted masks to unique home decorations and furniture. When we first bought the stock, the platform was approaching $5 billion of annual GMS (Gross Merchandise Sold). By the end of this year the consensus estimate is that they’ll reach $8.5 billion.”

5. Target Corporation (NYSE: TGT)

Iconic retailer Target is reaping the benefits of its timely investments in ecommerce channels. As consumers shift to websites to buy clothes, grocery and merchandise, Target is seeing record sales growth. In the first quarter of 2020, web sales for Target increased 141% over the same period last year. A record 5 million consumers shopped on Target.com for the first time in the quarter. About 2 million of them picked up their orders at curbside, the company said.

Jim Simons’ Renaissance Technologies is one of the leading shareholders of Target, with 6.83 million shares. The total value of these shares is over $1.1 billion. Overall, 57 hedge funds tracked by Insider Monkey have Target in their portfolios.

Click to continue reading and see the 5 Best Retail Stocks to Buy Now.

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Disclosure: None. 10 Best Retail Stocks To Buy Now is originally published at Insider Monkey.