Thanksgiving is behind us now, and that marks the traditional beginning to the annual holiday shopping season. It’s the major event for the retail industry, as a majority of retailers are in the red through the first three quarters of the year and only turn toward profitability in Q4 – and for some, specifically in December of Q4.
But this is 2020, a crazy year if ever there has been one, and can we really rely on past patterns to inform retail marketing and investment decisions? In a series of recent reports, the analysts at J.P. Morgan show that we probably can – that some patterns in American retail life are here stay, despite the ongoing coronavirus crisis.
“Consumers are in a decent place, with household savings 2x historic levels; but the biggest backhalf boost will likely come from the spending shift from "leisure" into goods, ” says JPM’s US credit strategist Carla Casella.
Expanding on this, and drilling down to specifics on the December shopping season, JPM analyst Christopher Horvers writes in a report on Broadlines & Hardlines Retail: “Given rising COVID fears, we expect ecommerce to further widen the gap vs. brick and mortar (as has been the case for most of this year) and believe the early December “spending valley” will be deeper this year given the shifting of holiday to November (and to some extent October with Amazon Prime Day); this favors ecommerce winners in retail, share gainers, and trip consolidators…”
To this end, Horvers has been looking for stocks that are well-primed for gains as we head into the hottest season of the year for retail. Let's take a closer look.
BJ’s Wholsesale Club Holdings (BJ)
We’ll start with a wholesale membership warehouse, a popular bulk-sale option that has attracted shoppers looking for deals. BJ’s, based out of Massachusetts, operates on the East Coast as well as in Michigan and Ohio, where it competes with the likes of Costco (COST). With the social and economic lockdown policies enforced against the coronavirus, consumers were kept home for large portions of the year – and simultaneously did not know when or where they’d be able to shop. The result: a surge in sales for warehouse clubs, whose bulk options offered convenience and competitive pricing.
This is clear from the share price, if nothing else. BJ stock barely blipped in mid-winter, when the pandemic response cratered the markets, and it rose for seven months solid afterwards. Entering the post-Thanksgiving shopping season, BJ is trading up an impressive 83% year-to-date.
Revenues and earnings also have been strong in 2020, with Q1’s top line at $3.8 billion, Q2 at $3.9 billion, and Q3 at $3.7 billion. EPS rose consistently through the year, and the third quarter earnings came in at 92 cents per share, up 19% sequentially and 124% year-over-year.
Horvers is highly bullish on BJ’s, writing of the company, “BJ remains one of our top picks and one of our three existing JPM Analyst Focus List stocks (along with TGT and MIK) given the potential for it to seize on its “moment in time” with strong comp and membership growth ultimately driving a significant re-rating given the inherent value of the membership model.”
In line with those comments, Horvers rates BJ an Overweight (i.e. Buy), and his $56 price target implies 33% growth in store for the year ahead. (To watch Horvers’ track record, click here)
Overall, the analyst consensus rating on this stock is a Moderate Buy, based on 9 reviews that include 6 Buys and 3 Holds. BJ shares are selling for $42 and the average price target, at $52.50, suggests it has room for a 25% upside in the next 12 months. (See BJ stock analysis on TipRanks)
Academy Sports and Outdoors (ASO)
This sports and outdoors supply chain is active in 16 states across the Midwest, South, and Southeast. The company got its start in San Antonio, Texas over 80 years ago, and now operates more than 250 stores with over 23,000 staff. The company is new to the public trading markets, having held its IPO just this past October.
Academy operates in a profitable niche – leisure goods like patio sets and barbecue grills, along with hunting and camping gear – which is particularly well fit for the consumer mood during the pandemic period. For the six months ended Aug. 1, Academy doubled its income to $157.7 million, compared to $73.8 million in the same period one year earlier.
ASO debuted on the market at $13 per share, and railed $203 million for the company. Since then, the shares shown solid gains, and are up 28% since trading commenced.
In his recent report on ASO shares, Horvers takes a positive stance, saying, “We believe ASO remains early in its ‘retail 101’ turnaround story with its assortment localization, merchandise planning, pricing, and promotion, and space productivity efforts harmonizing with strides in customer engagement and share gains… We see potential upside to 2H20 forecasts with the absolute magnitude of the comp strength yielding “revisions to our 2021 estimates. In addition, we expect ASO to pay down $600MM+ of debt in 4Q…”
It's not surprising, then, why Horvers gives ASO stock a Buy rating. His $21 price target indicates confidence in a 25% one-year upside.
Wall Street agrees with Horvers on this stock; the analyst consensus rating here is a Strong Buy, and it is unanimous, based on 8 Buy reviews set since the IPO. The average price target is $19.58, suggesting a 17% upside potential. (See ASO stock analysis at TipRanks)
Target Corporation (TGT)
Target Corporation is one of the staples of the retail scene, and in Horvers’ description, a ‘trip consolidator.’ Target stores offer their customers everything they need, from clothing to groceries to jewelry to housewares to toys for the kids – under one roof and at strong pricing points. Like BJ’s above, this aspect of ‘one-stop shop’ convenience has been an advantage for Target during the COVID-19 pandemic.
The company’s fiscal third quarter results show the extent of that advantage. The company gained $1 billion in market share during the quarter, and the top line revenue came in at $22.6 billion, compared to the $20.9 billion expected. Same-store sales, a key metric, rose more than 20%, and EPS came in at $2.79, a whopping 74% above the forecast. An important factor behind Target’s success this year was its status as an ‘essential retailer,’ allowing the company to keep its 1,900 stores open despite the lockdown policies.
TGT shares rose along with revenues. The stock is up 43% year-to-date, riding high on the strong retail numbers the chain is putting up.
In Horvers’ assessment, Target is a ‘best pick’ stock. He writes of the company’s position and potential: “With consumers still nesting, TGT is one of the best positioned to continue the market share gain this holiday season, in our view, with its multi-category portfolio and sprawling fulfillment options… we estimate a $1B sales run rate for TGT’s same-day delivery Shipt business, which compares to its $550MM acquisition cost… TGT is a core long-term holding given its ability to compete in the new world of omni-channel retailing and its opportunity to gain share over time and deliver relatively consistent financial results in line.”
In addition to these upbeat comments, Horvers rates TGT an Overweight (i.e. Buy) along with a $197 price target. This figure suggests an upside of 9.5%. This is modest compared to the upside on some of Horvers’ other picks – but only because share price gains have pushed the stock value up in recent weeks.
The Strong Buy rating on TGT, based on 15 Buys and 5 Holds, shows that Wall Street is in broad agreement with the JPM analyst. The stock is selling for $180.84, and its $193.12 average target implies a 7% upside from current levels. (See TGT stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.