The Zacks Retail – Miscellaneous industry consists of sporting goods retailers, office supply retailers, specialty retailers, distributors of beauty products, and sellers of a wide range of domestic merchandise. Some of the industry participants operate rural lifestyle retail stores, arts and crafts specialty retail outlets and also provide used car auction and salvage auction services.
Let’s take a look at the industry’s three major themes:
- The industry’s growth prospects are tied with the purchasing power of consumers. A favorable job market and rising wages have made consumers more confident in terms of spending. No wonder, some companies in the industry have been on a tear because of this favorable backdrop. Moreover, continued restructuring and expansion initiatives, including store openings and enhancement of distribution centers, should improve the performance of industry constituents. Certainly, the companies are trying all means to increase the number of store transactions, which, in turn, will have a favorable impact on comparable store sales.
- Most companies in the space are working on providing a deep assortment of products, enhancing in-store and online experience, and adopting a favorable pricing strategy in an effort to boost sales and achieve economies of scale. Initiatives like building omni-channel operations, coming up with reward programs, developing innovative products and services, and looking for buyouts are worth a mention. These efforts should result in better top and bottom-line performance in the long run.
- The brick-and-mortar retail business, which is the model for most of the companies in the Zacks Retail – Miscellaneous Industry, has turned highly competitive since Amazon (AMZN) started dominating all possible business areas as well as altering the way consumers shop. With the evolving shopping patterns, a significant number of players have been making significant investments to bolster their omnichannel operations. To that end, they are making constant digital innovations alongside undertaking store remodeling and refurbishments. While these endeavors could boost sales, they entail high costs. Apart from these, higher marketing, advertising and other store-related expenses might also compress margins.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Retail – Miscellaneous Industry is a 15-stock group within the broader Zacks Retail – Wholesale Sector. The industry currently carries a Zacks Industry Rank #94, which places it in the top 37% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1. The industry’s position in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate.
We will present a few stocks that have the potential to outperform the market based on a strong earnings outlook. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry vs. Broader Market
The Zacks Retail – Miscellaneous Industry has outdone both the broader Retail – Wholesale Sector and the Zacks S&P 500 composite over the past year.
The industry has rallied 19.8% over this period compared with the S&P 500 Index’s gain of 2.6% and the broader sector’s increase of 3.5%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of forward 12-month Price-to-earnings (P/E), which is commonly used for valuing retail stocks, the industry is currently trading at 14.19X compared with the S&P 500’s 16.64X and the sector’s 23.18X.
Over the last five years, the industry has traded as high as 24.11X, as low as 12.95X and at the median of 18.02X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
Affordable pricing, effective inventory management, a deep assortment of products and operational initiatives should keep driving sales. However, a deleverage in SG&A rate and other operating costs might impact margins. Nevertheless, a favorable operating backdrop and strategic initiatives undertaken by the companies give out positive signals for the Retail – Miscellaneous industry.
None of the stocks in the Retail – Miscellaneous space currently hold a Zacks Rank #1 (Strong Buy). However, we are presenting two stocks with a Zacks Rank #2 (Buy) and two stocks with a Zacks Rank #3 (Hold) that are well positioned to capitalize on the opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.
Bed Bath & Beyond Inc. (BBBY): This Zacks Rank #2 stock has gained roughly 26% in the past three months. This seller of range of domestic merchandise and home furnishings has registered positive earnings surprise in three of the trailing four quarters.
Price and Consensus: BBBY
MarineMax, Inc. (HZO): The Zacks Consensus Estimate for this recreational boat and yacht retailer has remained stable in the past 30 days. This Zacks Rank #2 company delivered average positive earnings surprise of 53.4% for the last four quarters.
Price and Consensus: HZO
Five Below, Inc. (FIVE): This Philadelphia, PA-based specialty value retailer has gained about 71% in a year. The company has an estimated long-term earnings growth rate of 30.3%. This Zacks Rank #3 (Hold) company delivered average positive earnings surprise of 9.4% in the trailing four quarters.
Price and Consensus: FIVE
Office Depot, Inc. (ODP): This Boca Raton, FL-based office supply retailing company has advanced approximately 38% in a year. The company has an estimated long-term earnings growth rate of 17.1%. This Zacks Rank #3 (Hold) company delivered average positive earnings surprise of 11.5% in the trailing four quarters.
Price and Consensus: ODP
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