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3 Retail Stocks to Watch in April

Demitrios Kalogeropoulos, Leo Sun, and Jamal Carnette, CFA, The Motley Fool

Some of the country's biggest retailers are posting their best operating results in years as consumers demonstrate their willingness to shop both online and in their local neighborhood stores. And as first-quarter results begin to trickle in, the big question is which stocks will outperform investor expectations by building on that 2018 momentum.

With those trends in mind, we asked Motley Fool contributors to highlight a few retailers worth watching this month. Read on to see why Target (NYSE: TGT), O'Reilly Auto Parts (NASDAQ: ORLY), and Bed Bath & Beyond (NASDAQ: BBBY) topped that list.

Two women share a secret while shopping.

Image source: Getty Images.

Put a bullseye on Target

Jamal Carnette, CFA (Target): Target's stock hasn't seen the strong run of its larger competitor Walmart, as over the last three years shares are flat versus a 45% gain for the latter. However, this is an opportunity, as the company is undertaking many of the same drivers that fueled Wally World's rise, most notably significant investment in the digital channel.

In 2017 the company committed $7 billion to improving the customer experience with a focus on building out the digital channel, buying Internet delivery company Shipt in the process. It's working. The company reported fourth-quarter comparable sales of 5.3% with a strong assist from digital sales, which increased 31%.

Despite outperforming the S&P 500 index this year -- up 22% versus 15% -- shares are still cheap, trading at a forward P/E ratio of 13 times versus 17.5 for the greater index. It's clear that investors have tempered expectations for the company going forward, but moderate expectations benefit value-oriented investors. Look for continued growth as a recommitment to customer experience and the digital channel drive revenue, earnings, and the stock price higher.

An auto parts giant aims for $10 billion in sales

Demitri Kalogeropoulos (O'Reilly): Automotive aftermarket leader O'Reilly is set to kick off its fiscal 2019 with first-quarter results on Wednesday, April 24. The retailer's stock outperformed in 2018 and could push that rally deeper into 2019 -- if trends keep playing out as they have in recent reports.

A man shops for auto parts.

Image source: Getty Images.

After all, O'Reilly's sales boost in the latest quarter surpassed management's forecast as the industry continued to benefit from a slowdown in new-car sales (and the concurrent increase in the average age of automobiles on the road). The chain notched surprisingly strong growth for the full year, too, which has reduced investor worries about industry disruption from online-only rivals.  

In late April the chain should report faster sales growth, with management's forecast calling for a 4% boost at the midpoint. CEO Greg Johnson and his team are also hoping to open as many as 210 new locations in 2019, compared to 200 last year. Together, these metrics will likely push annual revenue up above $10 billion for the first time. Later this month we'll find out whether O'Reilly stands by those broad goals or perhaps has decided to boost them in response to strong demand over the winter months.

A brewing activist battle

Leo Sun (Bed Bath & Beyond): Bed Bath & Beyond just reported its full-year earnings, and the results weren't pretty. For fiscal 2018, which ended on March 2, its revenue declined 3%, its comparable store sales dipped 1%, and its adjusted earnings tumbled 34%.

The retailer's troubles weren't surprising, since it's been struggling to compete against Amazon, Walmart, IKEA, and other retailers. However, two things make Bed Bath & Beyond an interesting stock to watch this month.

First, three major activist investors -- Legion Partners Asset Management, Macellum Advisors, and Ancora Advisors -- are trying to replace the retailer's entire board. The three firms, which own a combined 5% stake in the company, believe that they can boost its adjusted EPS from $2.05 in fiscal 2018 to $5 within a few years.

Second, Bed Bath & Beyond made some lofty claims during its fourth-quarter report. It claimed that while its revenue would likely decline 3% to 5% in 2019, its earnings would rise 3% to 7% on margin improvements. It also claimed that its revenue growth would accelerate over the "mid- and long term" and that its earnings would hit "double-digit growth" in 2020.

Those promises, likely aimed at appeasing the activists, are problematic because Bed Bath & Beyond is still trying to boost its sales with margin-crushing promotions and its loss-leading Beyond+ membership plan. Dropping those strategies would likely result in ugly comps declines.

I wouldn't buy Bed Bath & Beyond's stock yet, even though it looks cheap at nine times this year's earnings estimate. However, investors should follow the brewing activist battle and see if it paves the way for a meaningful turnaround.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Demitrios Kalogeropoulos owns shares of Amazon. Jamal Carnette, CFA owns shares of Amazon and Target. Leo Sun owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.