The retail industry is known for its volatility, and as competition continues to heat up from the growing e-commerce market, investors may be wondering if any retail stocks are worth the risk.
The short answer is that there are companies that are still benefiting from retail, and three Motley Fool contributors have highlighted a handful of retail companies that are worth keeping an eye on. Here's why Retail Opportunity Investments (NASDAQ: ROIC), Movado (NYSE: MOV), and Shopify (NYSE: SHOP) are worth considering.
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How to find opportunities in retail today
Anders Bylund (Retail Opportunity Investments): This tax-efficient real estate investment trust turns impressive profits from managing strip malls anchored by grocery stores, exclusively on the West Coast. With a 98% lease rate across the 89 shopping centers in its portfolio today, Retail Opportunity clearly knows how to pick retail spaces with strong long-term prospects from Seattle and Portland to San Diego and Orange County. It's all about location, and Retail Opportunity aims for markets with high household incomes and limited availability of land for new retail center construction. Nobody knows this extremely specific market quite like this company.
Retail Opportunity has more than doubled its real estate assets over the last five years, driving annual revenues from $111 million in 2013 to $296 million in 2018. And retail chains keep coming back for more, even in this era of booming e-commerce. Grocery-based strip malls seem less sensitive to the online threat than their big-box and mall store brethren. The average Retail Opportunity lease was renewed at 9% higher prices last year, while expanding clients paid 22% higher fees per square foot for their new leases.
As Retail Opportunities keeps boosting its business performance, market makers don't seem convinced. Share prices have fallen 17% over the last three years while both earnings and revenues rose by an annual average of 15% over the same span. Today, you can buy this high-quality cash machine at the affordable price of 17 times free cash flow or 19 times EBITDA profits. Add in a 4.5% dividend yield, and this stock starts to look like an undervalued income generator.
It is time for another beat from Movado?
Steve Symington (Movado): When I last highlighted Movado as an intriguing retail stock to watch in March, I argued the watchmaker was poised to soar if its quarterly report later that month showed it was able to sustain its momentum with strong demand for its wares. Sure enough, Movado popped over 20% in a single day after the company crushed expectations with that report, crediting a combination of consumers' positive response to its innovative products, expanding gross margins, and e-commerce growth with the help of its acquisitions of the MVMT and Olivia Burton brands.
But Movado stock quickly gave up much of that post-earnings pop over the subsequent trading days, only to drift higher in recent weeks as investors anticipate its first-quarter 2020 results later this month.
As it stands, we should look for Movado to at least reaffirm its full fiscal-year 2020 guidance for net sales of $750 million to $765 million (up 11.5% year over year at the midpoint), and for net income per share of $2.70 to $2.80 (up a modest 3% at the midpoint). The latter assumes the company continues its heavy investments in brand-building and integrating the MVMT business.
For what it's worth, most analysts are already modeling earnings near the high end of that range on revenue closer to $755 million. But if Movado is able to extend its streak of underpromising and overdelivering, I suspect the stock will respond favorably to the news.
Look beyond traditional retail
Chris Neiger (Shopify): Shopify isn't your traditional retail company, but it does help retailers and businesses of all shapes and sizes sell their goods online. The company offers a growing list of cloud-based services that help retailers set up an online presence, sell their products, and even do things like keep track of inventory and shipments.
Shopify has grown its e-commerce platform over the past few years and now boasts more than 800,000 stores that use its platform. The company reported its most recent quarterly results at the end of last month, and its results were nothing short of fantastic. Shopify's top line jumped 50% year over year to $320.5 million, outpacing both analysts' consensus estimates and management's guidance. The company's earnings were just as impressive. Earnings per share of $0.09 toppled Wall Street's expectations of $0.05 per share and were a huge improvement over $0.04 EPS in the year-ago quarter.
Investors looking for a new twist on retail investments need to give Shopify a look. The company's stellar growth is coming at a time when the e-commerce market is beginning to take off.
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Anders Bylund owns shares of Retail Opportunity Investments. Chris Neiger has no position in any of the stocks mentioned. Steve Symington owns shares of Retail Opportunity Investments. The Motley Fool owns shares of and recommends Retail Opportunity Investments and Shopify. The Motley Fool has a disclosure policy.