One of the surprise sectors of 2018 is retail stocks. For several years, analysts have warned about impending doom for brick-and-mortars. Significantly declining foot traffic not only represented a major headwind, but skeptics pondered how retailers could fight back. Moreover, e-commerce, specifically Amazon (NASDAQ:AMZN) has disrupted the traditional marketplace.
That said, retailers fought back with their own e-commerce solutions. Several department stores and big-box outlets are noticeably different from a generation ago. Today, it’s not uncommon for brick-and-mortars to offer ship-from-store options. Plus, an increasing number of retailers, including grocers, allow you to shop online and pick up the merchandise later.
Early indicators suggested that retailers’ comeback efforts gained traction. Unfortunately, the second-quarter earnings season happened. While the actual results for many companies were solid, investors weren’t confident that growth could be sustained.
Case in point was the Q2 report for Macy’s (NYSE:M). On paper, the department store did everything that was needed: an outstanding earnings beat, as well as a solid beat against the consensus revenue target. But year-over-year, sales growth slipped badly. And while same-store sales increased while analysts projected a decrease, the lift apparently wasn’t impressive enough.
Macy’s downfall cast a cloud on similar retail stocks as department stores floundered in unison. But does that mean this sector is done for good?
I must admit that I’m discouraged at how so many retail stocks lost momentum during Q2. Nevertheless, I believe smart contrarian opportunities exist here. While I wouldn’t go after every name indiscriminately, the current weakness makes some companies’ shares much more attractive.
Here are eight retail stocks I’m looking to pick up on discount.
Retail Stocks on Discount: Boot Barn (BOOT)
Among retail stocks, Boot Barn (NYSE:BOOT) has kept most of its market momentum intact in Q2. On a year-to-date basis, BOOT has gained more than 56%. That said, shares met some recent weakness. In mid-August, BOOT slipped more than 5% on the day.
However, this should be a temporary blip. Boot Barn stands above other retail stocks in that it’s a lifestyle brand. Plus, their products are hip and relevant, and appeal to all genders across multiple demographic categories. It also helps that our economy is rockin’ and rollin’. People are making more money, and they want to spend it.
The contrarian opportunity in BOOT stock is further solidified thanks to its underlying financials. It maintains impressive sales and especially net-income growth. This indicates to me that management runs a tight ship when it comes to overhead and expenses.
Retail Stocks on Discount: Ulta Beauty (ULTA)
Source: Mike Mozart via Flickr
While Amazon has understandably disrupted multiple retail stocks, I’m beginning to think that Ulta Beauty (NASDAQ:ULTA) is e-commerce proof. Even better, ULTA is on a recent discount. Since the beginning of this month, shares are down more than 4%.
So why am I so confident in ULTA stock? During my coverage of Macy’s recent earnings report, I picked up on a theme. Women have essentially sparked a revival among several retail stocks. Luxury-centric department stores cater to female shoppers, offering both a merchandise showroom floor as well as an experience.
This is a major advantage for Ulta Beauty that you shouldn’t overlook. For many women (so I’m told), finding the right fit or the right look is a painstaking process. Shopping online isn’t going to cut it. Additionally, Ulta stores offer an array of products and services that you can sample and utilize immediately.
No matter how technologically advanced Amazon becomes, they can’t replicate Ulta’s product-and-services mix.
Retail Stocks on Discount: Nordstrom (JWN)
Over the last several months, I’ve taken up intermittent fasting for health and wellness reasons. A significant benefit I’ve noticed right away is easier weight management. That said, a critical disadvantage to intermittent fasting is that apparel discounts become completely useless.
Let’s face it: unless you’re a size XXXXL, the discount rack is not for you. Even if you did find something size-appropriate on sale, you must endure the walk of shame to the cashier. Not so with Nordstrom (NYSE:JWN) and its Nordstrom Rack of discounted, quality goods. Everybody, and I do mean everybody, loves finding a great deal.
While I’m not big on department stores currently, the company now has more Nordstrom Rack stores than regular-priced stores. The off-season, off-price brand is likely the future of the iconic luxury retailer.
Furthermore, I appreciate that JWN isn’t leaving out the gents in the crowd. Earlier this year, the company announced its first stand-alone men’s store. Unlike its competitors, this added business offers an experience for all genders, which should naturally boost sales.
Retail Stocks on Discount: Dillard’s (DDS)
Department stores have suffered significantly this earnings season, and Dillard’s (NYSE:DDS) is no exception. Although its YTD haul remains impressive at nearly 26%, its Q2 performance didn’t quite go as planned. As a result, shares have dropped more than 18% since August 14th.
But did the markets overreact with their bearishness? DDS stock is a risky proposition, but it also has a contrarian case. For starters, the Q2 result was on paper superb. Dillard’s produced an earnings per share loss of 10 cents, which compared very favorably to an expected 44-cent EPS loss. The company also delivered $1.5 billion in revenue, nearly 2% above consensus, and up nearly 3% YOY.
So why did the markets take down DDS? I believe investors saw a credibility issue with certain companies, and decided to give up on retail stocks entirely. For instance, Macy’s enjoyed a top and bottom earnings beat, but its sales slipped YOY.
In my view, DDS had the more credible performance, but the markets aren’t rewarding it. Although speculative, this might be the time to take advantage.
Retail Stocks on Discount: LVMH Moet Hennessy Louis Vuitton (LVMUY)
Source: Mathieu Lebreton via Flickr
Luxury-retail brands are usually great opportunities if they go on discount for one simple reason: the people that can afford their products aren’t going to complain about a recession or two.
That said, LVMH Moet Hennessy Louis Vuitton (OTCMKTS:LVMUY) doesn’t take their customers for granted. Recognizing that lean times can impact even the affluent, the company’s iconic Louis Vuitton unit began targeting middle-income shoppers two years ago. Offering more reasonably-priced products, Louis Vuitton carefully balanced accessibility with exclusivity.
This strategy along with others across its vast portfolio worked like a charm. But recently, LVMUY stock has hit a snag. Since August 1st, shares slipped 3%, and since May 21st, LVMUY is down more than 8%.
However, this slowdown should be temporary. With a robust labor market, several retail stocks should perform well as we approach the holiday season. Also, a stronger dollar relative to foreign currencies should lift American sales.
And what about non-American customers? Like I said, those who can afford LVMUY products aren’t likely to be dissuaded by currency-exchange fluctuations.
Retail Stocks on Discount: Tiffany and Co (TIF)
Like so many other retail stocks, Tiffany and Co (NYSE:TIF) has suffered significant declines recently. Since the beginning of August, TIF dropped 6.5% in the markets. But I also think that shares could drop even more. I wouldn’t buy until it falls below its current 200 day moving average, which is approximately $110.
But if TIF stock does get that low, I’m willing to give it a go. A big reason why is the aforementioned growth in the labor market. But an underappreciated component of the jobs number is the declining wage gap between men and women. Significant work remains as women currently earn about 82% what men earn. Still, we’re making progress towards wage equality.
Furthermore, the narrowing of the wage gap is largely attributed to women making advancements in education and occupational diversity. Some troubling elements like gender discrimination remain, but based on progressive social mores, these negatives will likely fade. Plus, the Harvard Business Review reported recently that female participation in the workforce is a net positive for all.
This is a long-winded way of saying that I’m bullish on women. By logical deduction, retail stocks like TIF that cater towards women consumers are solid opportunities.
Retail Stocks on Discount: Microsoft (MSFT)
When discussing retail stocks, Microsoft (NASDAQ:MSFT) doesn’t typically pop into mind. But as a technicality, MSFT is indeed a retail investment. Thanks to its Microsoft Store, which is both a brick-and-mortar and online platform, the company can directly sell its products to their customers.
I must admit that when I first saw a Microsoft Store open in my local shopping mall, I thought it was a tacky replica of Apple’s (NASDAQ:AAPL) physical outlets. Certainly, during its initial run, this Microsoft Store wasn’t attracting anywhere near the people the Apple store was pulling in. But as the MSFT management team progressively made Microsoft great again, I noticed a big change.
Now, the company’s brick-and-mortar presence is a happening place to be. Microsoft has an enviable ecosystem which drives demand across multiple product categories. It’s not quite to Apple’s level, but the improvement is tangible.
Plus with MSFT stock slowing down over the past few days, it’s a more attractive play than Apple.
Retail Stocks on Discount: JCPenney (JCP)
JC Penney (NYSE:JCP) is an extremely high-risk, high-reward opportunity. I shouldn’t even call it an opportunity, but rather, a pure gamble: you’re either going to love life, or your money will find a cold, damp place to die.
In fact, I twice last year labeled JCP stock a disaster: first in October, and then the next month in November. Temporarily, my bearishness got the better of me when retail stocks started gaining earlier this year. But just before spring, JCP did what I expected it to do: fall, and keep falling.
But when shares started to level out in late June, I thought the worst was over. I was wrong. For its Q2 earnings report, JC Penney missed on all critical metrics. But the worst part came when management downgraded guidance for the full year to shocking lows.
So does hope exist for JCP stock? Barely, but if you want to gamble, you have to two things going for you. First, the ugliness may have been priced in at one fell swoop. Second, the retailer may have a chance to attract female Hispanic consumers, particularly Millennials.
According to NBC News, Hispanic shoppers are opening their wallets at incredible rates. Because of this dynamic, JCP can win through its attractive pricing.
However, JC Penney has gone this route before to little success. But with the company’s life on the line, perhaps management can find that extra gear this time around.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.