Retail stocks got hammered in May amid a flurry of bad earnings reports, which converged on rising tariffs and slowing economic expansion concerns to create a perfect storm for retailers. That’s why I wrote a piece a few weeks back that highlighted five retail stocks that were getting slaughtered in the retail selloff.
Those five retail stocks were Nordstrom (NYSE:JWN), Kohl’s (NYSE:KSS), J.C. Penney (NYSE:JCP), Urban Outfitters (NASDAQ:URBN) and Lowe’s (NYSE:LOW), all of which reported disappointing early 2019 numbers. But, that was just the tip of the iceberg. Since then, many more retailers have reported ugly early 2019 numbers, and many more retail stocks have been slaughtered, including Abercrombie & Fitch (NYSE:ANF), Capri (NYSE:CPRI), Canada Goose (NYSE:GOOS), PVH (NYSE:PVH), Movado (NYSE:MOV), Gap (NYSE:GPS), Tilly’s (NYSE:TLYS) and many more.
But, not all retailers reported bad numbers in early 2019. Indeed, there were a select few retailers that actually put up strong early 2019 numbers. That’s impressive against the dour backdrop. As such, these retailers are probably the retailers you want to be buying into for the rest of the year.
With that in mind, let’s take a look six retail stocks that actually popped this earnings season on surprisingly strong numbers.
Dollar General (DG)
Source: Mike Mozart via Flickr
First up we have dollar store giant Dollar General (NYSE:DG), which reported strong first quarter 2019 numbers that topped expectations across the board and featured favorable growth trends.
Specifically, Dollar General’s first-quarter revenues and profits both topped expectations, while comparable sales rose more than expected. Further, comparable sales growth was 3.8%, on top of 2.1% growth in the year-ago quarter, so this company is clearly on an accelerating and positive growth trajectory. Gross margins did fall back in the quarter, but only marginally, and they’ve been stable around 30% for the past several years. Opex rate expansion moderated in the quarter, and profit growth was better than expected.
Broadly, the results were more of the same for Dollar General. This company has been reporting positive comparable sales growth for the past decade, regardless of retail backdrop noise, because consumers consistently and always flock to low price consumables. So long as this trend persists — and it will — DG stock should outperform the broader retail industry.
Dollar Tree (DLTR)
Source: Mike Mozart via Flickr
Next up, we have the other dollar store giant, Dollar Tree (NASDAQ:DLTR), which likewise reported strong first quarter numbers that topped expectations where it matters. But, unlike Dollar General, the quarter wasn’t great from head to toe.
On the positive side, comparable sales growth and revenues both topped expectations in the quarter, while second quarter and full year 2019 comparable sales growth is expected to remain positive. But, on the negative side, profits were merely in-line with expectations, and the full year 2019 profit guide was cut 2.5% to well below consensus levels. Gross margins also fell big in the quarter. The opex rate rose noticeably. Operating margins took a tumble. And, the depressed fiscal 2019 profit guide doesn’t even include the full impact of tariffs.
All in all, Dollar Tree had a good quarter, but not a great one like Dollar General. Nonetheless, Dollar Tree did report positive comps, a sign that the price focus strategy is working, as it has worked over the past decade (through which Dollar Tree has consistently reported positive comps). While big upside is limited by trade headwinds, DLTR stock should be able to move gradually here thanks to continued positive comp trends.
The third retail stock that was red hot this earnings season was big box retailer Target (NYSE:TGT), which reported first-quarter numbers that ran laps around the rest of retail.
Revenues topped expectations in the quarter. So did profits. Comparable sales rose a whopping 4.8% (ahead of expectations for a 4.1% gain), while traffic rose 4.3%. Digital sales soared 42% higher. Gross margins fell back a measly 20 basis points, among one of the smallest declines in the entire retail sector this quarter. The opex rate actually dropped, and operating margins expanded. On top of all that, management provided healthy second quarter and full year 2019 guides that called for low-to-mid single digit comparable sales growth in both periods.
In other words, everything is going right for Target at a time when nothing is going right for a bunch of its retail peers. The implication? Target is rapidly stealing share, and will continue to do so as the company is aligned with every important trend in retail (all-in-one convenience, low prices, digital sales, omni-channel capabilities, in-house brands, so on and so forth). As such, Target will only gain momentum over the next several quarters, and as it does, TGT stock will head higher.
Joining Target, another big box retail giant that reported far better than expected first-quarter numbers was Walmart (NYSE:WMT).
Walmart also reported a big positive comp in the quarter (+3.4%) with strong digital sales growth (+37%) and margin stabilization (for example, the Flipkart acquisition). This has become the trend at Walmart. The company has successfully pivoted to become a more fierce Amazon (NASDAQ:AMZN) competitor by building out a robust digital business, expanding omni-channel capabilities, enhancing logistics, and improving pricing and merchandising. Further, the company has tested the waters with streaming, digital advertising and cloud, illustrating that this company’s innovation curve is rapidly inflecting higher.
All in all, Walmart has turned into an innovative omni-channel retail giant that has successfully aligned itself with all of today’s important retail trends. Because of this, Walmart projects as a winning retailer for the foreseeable future, and WMT stock likewise projects as a winning stock.
Home Depot (HD)
In a total different area of retail, Home Depot (NYSE:HD) shined bright this quarter as the home improvement space benefited from the convergence of a strong U.S. consumer and low interest rates.
Home Depot beat first-quarter revenue and profit estimates by a healthy margin, while reporting a strong 2.5% rise in comparable sales (3% rise in U.S. stores). Gross margins fell back some, as was the norm across the entire retail sector in early 2019 due to tariffs. But, the company levered the expense rate thanks to continued robust sales growth, and operating margins were flat in the quarter. Going forward, Home Depot actually expects things to pick-up, as the guide calls for ~5% comparable sales growth through all of 2019.
Broadly, Home Depot reported a really strong quarter. That’s because the underlying fundamentals here are good. The U.S. consumer is strong, defined by record low unemployment, a healthy job participation rate, and decade-high wage growth. Meanwhile, the Fed has moved to the sidelines, and rates have steadily dropped through the first half of 2019. Specifically, mortgage rates have dropped in a big way, and that has created support for a healthy housing market.
Overall, the home improvement environment continues to be supported by healthy underlying trends. So long as this remains true, Home Depot will continue to report solid numbers, and HD stock will trend higher.
TJX Companies (TJX)
Source: Mike Mozart via Flickr
Last, but not least, we have off-price retail giant TJX Companies (NYSE:TJX).
TJX proved yet again with strong first-quarter numbers that the off-price retail strategy is a winning one that works even when other retail strategies fall short. TJX’s first-quarter numbers beat on revenue and profit expectations. The company also reported 5% comparable sales growth, on top of 3% comparable sales growth in the year-ago quarter, and on the back of big traffic gains. Operating margins did drop, due to a lower gross margin and higher opex rate. But, that drop was offset by 7% sales growth.
Overall, TJX proved that the consumer’s affinity for price does not change with the times. It is steady and consistent, and that’s why TJX has reported steady and consistent positive comps for the past several years. This trend will persist, regardless of the economic backdrop. As it does, TJX stock will move higher.
As of this writing, Luke Lango was long JWN, URBN, DG, TGT, WMT, AMZN and HD.
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