U.S. Markets closed

3 Retail Stocks I'd Buy Right Now

John Ballard, The Motley Fool

We learned in 2018 that the retail industry is not in a death spiral after all. There are plenty of thriving retailers that are delivering profitable growth for shareholders. I've selected three retailers that offer investors the potential for good returns without having to pay through the nose to own them.

Walmart (NYSE: WMT) doesn't need an introduction, but the world's largest retailer is having tremendous success with its e-commerce strategy. Tractor Supply (NASDAQ: TSCO) is still posting solid performance after 80 years in business serving rural households. Meanwhile, investors are overlooking the growth happening in Hanesbrands' (NYSE: HBI) Champion athletic wear brand, which presents an opportunity for the patient investor.

A blue car drives through the parking lot of a Walmart store.

Walmart is testing self-driving car delivery. IMAGE SOURCE: WALMART.

Walmart is on offense

Despite the relentless onslaught from Amazon.com, the Bentonville, Arkansas retailer won't go away. Walmart continues to report steady growth in comparable-store sales, which reflects the company's dominant nationwide presence with over 4,700 stores spread around the country, putting key categories like food and other everyday essentials within a short distance of most of the U.S. population. That wide footprint of stores is serving Walmart well as grocery delivery emerges as an important battlefield in e-commerce.

In the third quarter, online sales surged 43% year over year. A significant contributor to that growth has been Walmart's successful rollout of its grocery pickup service across 2,100 locations and 700 pickup towers. Walmart is investing heavily in e-commerce and experimenting with new ideas through its Store No. 8 portfolio of start-up companies. Those investments are paying off given the company's recent market-share gain across important categories like food and general merchandise. 

You're not going to hit a home run with Walmart stock, but I expect the company to put up solid numbers for shareholders for a long time and remain an anchor investment you can count on when the market gets volatile during tough economic times. Walmart currently trades for a forward price-to-earnings ratio of 20.4 and pays a dividend yield of 2.19%. 

Tractor Supply fills a profitable niche

Tractor Supply is the largest rural lifestyle retailer in the U.S., with 1,748 stores open at the end of the third quarter of 2018. While some retailers struggled with weak traffic a few years ago, Tractor Supply consistently delivered comp sales growth. Its stock price has been mostly flat over the last five years, but the company has steadily grown sales from $5.2 billion in 2013 to an expected $7.8 billion for 2018. 

The company has had success with its ONETractor strategy to drive growth in profits, online sales, and product assortment while investing in data analytics and the customer shopping experience. Based on strong performance through the third quarter, management raised its full-year outlook for 2018. A lower tax rate is expected to boost earnings per share by 28% over 2017 to a range of $4.23 to $4.27. However, analysts expect the company to grow earnings 14.5% per year over the next five years. 

Management sees an opportunity to open as many as 2,500 stores over time. Tractor Supply has been around for more than 80 years, and since it's still growing sales and earnings this well, I expect the company to continue to find ways to deliver growth for shareholders for many years. The stock trades at a forward price-to-earnings ratio of 18 times analysts' earnings estimates for 2019 and also pays a dividend yield of 1.46%. 

Hanesbrands owns one of the hottest athleisure brands

The share price of Hanesbrands has steadily declined over the last three years, as sales of its socks and underwear are not growing. The company has struggled to increase earnings as a result, and that's left the stock trading for a cheap forward price-to-earnings ratio of just 7.7. Basically, at that valuation, the market expects Hanesbrands to be in a perpetual decline, which I think is unrealistic considering what is happening in the business.

About two-thirds of Hanesbrands' sales are innerwear, with the rest being activewear. Total sales rose 4.3% year over year through the first three quarters of 2018, while operating profit increased 0.7%. That doesn't look like a business in decline.

Management expects innerwear sales to be flat in 2019, but the reason to own the stock is the strong growth happening in activewear. Sales of the company's Champion athletic wear brand increased 40% year over year in the last quarter, excluding sales to mass retailers. Champion currently makes up about 18% of Hanesbrands' total sales, but management expects to grow the brand from $1.2 billion in trailing 12-month sales to $2 billion by 2022. Part of that plan includes opening stand-alone Champion stores around the world where they see strong demand. 

Given the trends in athleisure, which has fueled a steady increase in athletic apparel sales over the last decade, it's possible that Champion sales could eventually grow to become half of Hanesbrands' business. In that scenario, Hanesbrands doesn't seem like a company that deserves to trade for such a low valuation, especially when the stock pays a dividend yield of 4.3% currently, which the company can support with its free cash flow.  

More From The Motley Fool

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. John Ballard owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Tractor Supply. The Motley Fool has a disclosure policy.