7 Retail Stocks That Will Rise From the Ashes
Retail stocks are always tricky.
Firstly, the macro backdrop for retail has to be healthy in order for retail stocks to rise. You need to have strong consumer confidence and upbeat consumer spending patterns. You also need Amazon.com, Inc. (NASDAQ:AMZN) to stop taking over the retail world.
Secondly, the trend has to be your friend. Consumers need to find a particularl retailer’s clothing fashionable, relevant, and cool. If not, consumers won’t come through your doors regardless of a healthy macro backdrop.
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Because of this trickiness, retail stocks, by and large, have had a tough run over the past several years.
But not all is lost in the retail sector. Holiday 2017 was really, really good for a bunch of retailers, showing that Amazon isn’t eating the whole retail pie. Instead, when macro spending conditions are positive, consumers are buying from all retailers, not just Amazon.
Moreover, Amazon might come under regulatory scrutiny soon as Trump continues to focus on the company’s supposedly unfair tax treatment.
All together, there is finally a light at the end of the tunnel for retail stocks. But who will rise the most in this group? Let’s take a look at the 7 retail stocks which should be the biggest winners over the next several quarters.
Retail Stocks That Will Rise From the Ashes: VF Corp (VFC)
Piper Jaffray is out with their most recent semi-annual Taking Stock With Teens Survey, and one of the biggest winners from that survey is VF Corp (NYSE:VFC).
Source: Andy Via Flickr
Piper Jaffray discovered that among the all-important and trend-oriented teenage crowd, streetwear styles are gaining momentum on athletic styles. This is a big pivot because athletic styles have dominated the retail scene for several years.
At the front of this streetwear movement is Vans, which is owned by VFC. Piper Jaffray pointed out that Vans gained significant mind-shared year-over-year.
VFC’s own numbers support this trend. Vans reported revenue growth of 38% in the Americas segment last quarter. Globally, growth wasn’t much slower at 35%.
If this Vans-led streetwear trend continues to accelerate, then VFC stock should head higher, even after a 40%-plus rally over the past 12 months.
Retail Stocks That Will Rise From the Ashes: Ulta Beauty Inc (ULTA)
Dominant cosmetics retailer Ulta Beauty Inc (NASDAQ:ULTA) went from red-hot to ice-cold over the past year. The company was once riding secular tailwinds in cosmetic spending growth thanks to the widespread proliferation of selfie-oriented, picture-based apps like Snapchat and Instagram. But those tailwinds have seemingly taken a backseat to competitive headwinds as department stores are finally starting to run deep discounts on cosmetic products.
Source: Shutterstock
ULTA’s growth has come down, and so has the stock. From $300 to $200.
But this sell-off seems slightly exaggerated. There is still secular growth in cosmetics spending. Piper Jaffray’s survey found that beauty spending among teenagers grew 4% year-over-year in early 2018, while the usage of Snapchat and Instagram soared higher. These trends are still in their early stages, so ULTA should be able to keep putting up big numbers into the foreseeable future.
The valuation on ULTA stock (20-times forward earnings) is pretty cheap considering that earnings growth over the next several years is pegged at 20% per year. As such, this stock could rally big if the numbers stay strong.
Retail Stocks That Will Rise From the Ashes: American Eagle Outfitters (AEO)
Teen clothing retailer American Eagle Outfitters (NYSE:AEO) has been rising alongside other retail stocks for the past several months amid a burgeoning consumer spending backdrop.
Source: Mike Mozart via Flickr (Modified)
But AEO has one major catalyst that a lot of other retailers don’t have: a red-hot Aerie brand that is rapidly taking over the women’s intimates market.
At this point in time, the AEO growth narrative is less about American Eagle and more about Aerie. Aerie is the company’s women’s brand which is focused mostly on intimates, but also includes swimwear and other beach attire.
It has been on fire recently. Comparable sales at Aerie rose 34% last quarter. The catalyst for this massive growth is the company’s all-natural beauty movement. Aerie focuses on natural beauty, not the bombshell beauty that longtime intimates king Victoria’s Secret promoted. As women have migrated from bombshell beauty to natural beauty, Aerie has rapidly taken market share from Victoria’s Secret.
This trend is only getting started. Aerie is in the early innings of turning into a major brand. As this transformation plays out, AEO stock should head considerably higher.
Retail Stocks That Will Rise From the Ashes: DSW Inc. (DSW)
Shoes and accessories retailer DSW Inc. (NYSE:DSW) recently reported fourth numbers that underscore the thesis that this company’s turnaround strategy is well underway.
Source: Shutterstock
DSW has gone from checking off none of the check-boxes in retail to checking off all of them. Comparable sales has flipped from negative territory into positive territory. Gross margins have gone from falling big to rising big. Operating margins have also gone from falling big to rising big.
This feels like the start of sustained growth for DSW. The company is reinventing itself in today’s dynamic and on-demand retail environment. Not only is the company building out its e-commerce capabilities, but they are also rolling out multi-purpose stores next year with manicure and shoe repair stations.
This feels like the future of brick-and-mortar retail. Malls have reinvented themselves by adding mulit-purpose entertainment options, like gyms, restaurants, and movie theaters. Stores will undergo a similar transition, and likewise turn into multi-purpose destinations of their own.
It is good to see DSW at the forefront of this trend. This could allow DSW stock to head higher over the next several quarters.
Retail Stocks That Will Rise From the Ashes: Skechers (SKX)
For all the love that the athletic retail triumvirate of Nike Inc(NYSE:NKE), Under Armour Inc (NYSE:UAA) and adidas AG (ADR) (OTCMKTS:ADDYY) get, none of them are growing as fast as less talked about Skechers USA Inc(NYSE:SKX).
Source: Shutterstock
At Nike, Under Armour, and Adidas, revenue growth ran from 5% to roughly 20% last quarter. Skechers reported revenue growth of 27% last quarter.
How is that possible? While Nike, Under Armour, and Adidas are fighting over the trend-oriented, hip crowd that are fine paying $100 and up for shoes, Skechers is outright dominating the rest of the market.
There are ton of us out there who just don’t want to pay $100 to $200 for a pair of running shoes. But we still want great quality. That is where Skechers steps in. They offer great quality shoes in the under $100 price range.
As it turns out, there is huge demand in the footwear market for good quality at a reasonable price. That is why SKX has consistently reported robust revenue growth. But SKX stock still trades at a huge discount to the NKE/UAA/ADDYY crowd. As such, so long as the numbers at SKX remain good, this stock could roar higher.
Retail Stocks That Will Rise From the Ashes: Francesca’s Holdings Corp (FRAN)
One of the worst performing retailers in the stock market is Francesca’s Holdings Corp (NASDAQ:FRAN). Comparable sales are down big (off 15% last quarter). Gross margins are in free fall (down 250 basis points last quarter), and the company is much less profitable today than it was last year (operating margins down from 16.1% to 7.5%).
Source: Shutterstock
FRAN stock has consequently dropped from $15 to under $5 over the past year.
But in context, these struggles aren’t so bad. From 2010 to 2016, FRAN was one of the most popular retailers in the world. During that stretch, cumulative comparable sales rose more than 50%. That is miles above everyone else in this sector.
Thus, when FRAN’s operations started normalizing this past year, that normalization was due to be huge. We got that normalization, and now, I think it’s back to normal for this still trendy retailer.
FRAN has long a made killing as an Instagram/Pinterest-oriented store that sells artsy/cutesy stuff. This niche hasn’t lost its long-term value. So long as photo-first artistic apps like Instagram and Pinterest remain popular, FRAN should have a strong core shopper demographic.
But at currently depressed prices, FRAN stock isn’t priced for really any growth. As such, once comps come back into positive territory, this stock could roar higher.
Retail Stocks That Will Rise From the Ashes: Dicks Sporting Goods (DKS)
One of retail’s biggest winners in the first quarter of 2018 was sporting goods retailer Dicks Sporting Goods Inc (NYSE:DKS). DKS stock stormed 22% higher in Q1, largely thanks to improving sentiment and stable operational results.
Source: Shutterstock
For all intents and purposes, it looks like DKS stock bottomed in October 2017 and has been on a steady grind higher ever since. This grind higher should continue over the next several quarters.
Widespread sports retail bankruptcies were supposed to be a huge tailwind for DKS a few years back. For about year, that happened. Then that tailwind disappeared over the past several quarters, and was replaced by a headwind in the form of athletic brands like Nike pushing a direct selling strategy over a wholesale selling strategy.
But the risks related to that headwind were overblown. Nike and other athletic retail brands don’t plan to completely ditch DKS. They simply plan to optimize distribution so that the right product gets in front of the right consumer. DKS, as the largest sports retailer left standing, is a huge part of every athletic brand’s product distribution strategy.
Consequently, DKS will live to fight another day. And DKS stock, which is priced for death at just 12-times forward earnings, should head higher as sentiment and expectations normalize.
As of this writing, Luke Lango was long SKX, FRAN, and DKS.
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