To put it bluntly, retail is a bloodbath these days. Consumers have gotten fickler than ever, which has created an interesting environment for many retail stocks to operate in.
Today, people want their goods when they want it and how they want it. This means that both physical stores and digital commerce need to be blended. Two-day and even one-day shipping is now the norm, while online ordering and pick-up have quickly become a default option for many consumers.
Needless to say, a lot of retail stocks have buckled under this pressure. Store closures and bankruptcies dot the sector.
However, not all retail stocks are being tossed to the wolves. In fact, several are getting it right. That includes the right tech and consumer experiences to compete in the new omnichannel paradigm. These winners are proving that investors don’t have to ignore the sector completely, but they do have to be selective. Choose wrong and you could be staring at plenty of empty storefronts.
Which retailers are getting the job done in omnichannel? Here are five retail chains that will be winners in the years ahead.
When being a “foodie” and collecting kitchen gadgets weren’t as popular as they are today, Williams-Sonoma (NYSE:WSM) was really the only game in town for it. If you wanted to find new kitchen appliances, high-end imported foods, and other now-common kitchen items, you had to go to WSM. Because of this, the retailer has built up a fanatical fanbase of customers.
The best part is this fanbase tends to be older and more affluent than typical bargain shoppers. After all, if you’re willing to drop nearly $12,000 on an espresso machine, you have some cash to spend. And they tend to transfer their love of the brand down to their children when they finally become adults.
The same could be said for its other major brands like Pottery Barn and West Elm for home furnishings. WSM has managed to create a cohort of wealthy customers that are willing to shop there first before anywhere else. This gives it a monster edge over many other retail stocks.
Williams-Sonoma has been an earnings machine — especially in the world of omnichannel. It has been able to get people into its stores for demos and product help while making plenty of revenues online. Sales have grown by an annual rate of 6% per year since 2010, while earnings have grown 11% per year over the same time. And it has been sharing the wealth via a growing dividend. Today, WSM yields almost 3%.
All in all, WSM stock has all the right ingredients to keep winning in the new retailing world.
Five Below (FIVE)
Dollar stores have been incredibly resilient in the face of rising online and omnichannel shopping. But dollar-store Five Below (NASDAQ:FIVE) isn’t like your local Dollar General (NYSE:DG). The product is very different. That is, it’s geared towards kids, tweens, and even college students. You’re looking at toys, games, cheap tech gear and beauty items. Moreover, much of the product mix shifts as the season’s change — which adds a “treasure hunt” aspect to their locations and necessitates repeat customers.
And customers are coming back in a big way.
Because of its operating model and low-cost of goods, the funky dollar store has managed to turn sales into actual profits. New stores have an average payback time of just one year, while profits have compounded by over 32% per year since its IPO. That’s torrid growth considering this is a budget retailer. And FIVE has managed to do all of this without debt.
Given its focus on tweens as well as on-trend goods, the retail stock has a unique niche that can’t be tackled by many other rivals. For investors, this position offers plenty of opportunities to grow into the future.
The grocery business is pretty cutthroat to begin with. Margins tend to be thin, consumers fickle. For many retail stocks that have operated in the sector, bankruptcy has been a forgone conclusion. This is especially true now that e-commerce giants like Amazon (NASDAQ:AMZN) have entered the market.
But Kroger (NYSE:KR) seems to be getting it right, albeit slowly. The firm has been able to leverage its scale as the nation’s largest supermarket chain to make a serious go at the new world of omnichannel.
This includes unveiling new order ahead options for its products, apps, a big partnership with Instacart, and other tech-oriented consumer experience products. Today, KR has more than 1,685 stores that offer order pickup locations as well as over 2,125 delivery locations for its groceries. That covers about 93% of its customers.
These efforts have helped grow digital sales by more than 42% during the first quarter of this year. Meanwhile, Kroger has been copying Amazon and Walmart’s (NYSE:WMT) playbooks and moving into so-called alternative revenue streams. This includes media and advertising, customer data, and other real estate investments. KR is on track to start producing some significant revenues this year. So far it crushed its latest earnings estimates and was able to increase its dividend by a whopping 14%.
Though KR’s moves are working at a slow pace, the grocery giant could be an interesting value among retail stocks. KR is getting it right, it’s just taking time. At least you get paid a hefty dividend while you wait.
Home Depot (HD)
What housing crisis?
That’s the mantra for home improvement giant Home Depot (NYSE:HD). The retailer continues to see rising sales and demand for various home improvement products and services. And the reason is simple: HD has started to seriously court the next generation of homeowners.
Thanks to generally low interest rates and looser lending standards, Gen X and Millennials are finally able to buy homes. But they are not buying move-in ready McMansions. They’re buying fixer-uppers that require plenty of sweat equity, which means plenty of trips to Home Depot. Moreover, HD has courted these customers with new omnichannel operations, mobile apps, and customer service experiences.
It’s working in a big way. Last year, HD pulled in record profits and the streak is continuing this year. Sales for the first quarter of this year increased 5.7% to clock in at $26.4 billion. Earnings per share managed to jump by over 9%. Its continued moves into omnichannel have certainly helped on this front.
With the continued revenue and EPS gains, HD has rewarded shareholders in a big way. Thanks to improved results, Home Depot unveiled a new monster $15 billion buyback program and increased its dividend by an insane 32%. And with interest rates set to drop further, more people could be able to buy a home.
All in all, HD’s outlook could be one of the rosiest of all retail stocks.
O’Reilly Automotive (ORLY)
Grease monkeys and gearheads could give a flip about online and e-commerce sales. Both classic and modern cars require plenty of knowledge and specialized parts, many of which can only be found at your local auto parts store. Moreover, several maintenance issues require special disposal of waste. You can’t just chuck old motor oil down the drain. That necessitates a trip to a physical location.
All of this could help explain why O’Reilly Automotive (NASDAQ:ORLY) crushed the market last year.
The retail stock has seen plenty of steady single and low double-digit earnings increases over the last few years as the economy continues to expand and miles driven increase. As long as the economy continues to clip at a steady pace, ORLY should be able to get the growth going.
Another reason for its success is its management team. The stock is packed with insiders and family ownership. Because of this high ownership, management often takes more long-term views of investments and decisions. Yes, it’s about improving quarter to quarter, but its more about building the company over the decades. And ORLY has done just that. During the recession, a decision to expand made the firm the giant it is today.
With new moves to court professional garages and a $1 billion buyback now under its belt, ORLY continues to make the right moves in the new retail environment.
At the time of writing, Aaron Levitt had a long position in AMZN.
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