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The Zacks Retail – Miscellaneous industry participants have been focusing on superior product strategy, advancement of omni-channel capabilities and making prudent capital investments to strike the right chord with consumers. Markedly, Tractor Supply Company (TSCO), Five Below, Inc. (FIVE), DICK'S Sporting Goods, Inc. (DKS) and MarineMax, Inc. (HZO) look well poised, courtesy of a strategic review of their business operating model, growth prospects and cost structure.
However, players in the industry have been witnessing high costs associated with operations amid the coronavirus crisis. Also, pandemic-led local limitations and capacity constraints remain concerns.
About the Industry
The Zacks Retail – Miscellaneous industry covers retailers of sporting goods, office supplies, and specialty products, 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 outlets, and even provide used car auctions and salvage auction services.
4 Trends Shaping the Retail – Miscellaneous Industry’s Future
Consumers’ Willingness to Spend: The industry’s prospects are correlated with the purchasing power of consumers. Markedly, the two-pronged approach of massive stimulus package and mass inoculation drive buoyed consumer spending activity, with retail sales witnessing a sharp upswing in the month of March. The Commerce Department stated that U.S. retail and food services sales rose 9.8% sequentially to $619.1 billion. Evidently, the passing of a coronavirus relief package worth $1.9 trillion that entitles eligible Americans to $1,400 stimulus checks has triggered spending across the board. Clearly, demand was not restricted to a few categories as was noticed when the coronavirus crisis gripped the economy. We believe that the reopening of the economy and gradual return to active social lifestyle, events and occasions are likely to spur demand. Also, industry experts believe that companies have been resorting to location analytics and other data-driven tools to better engage with customers amid the ongoing crisis.
Focus on Boosting Portfolio & Market Reach: Most companies in the space are working on providing a wide assortment of products, enhancing online experience and adopting a favorable pricing strategy to boost sales. Initiatives such as building omni-channel operations, coming up with reward programs, and developing innovative products and services are worthy a mention. Of late, there has been an increase in demand for office supplies, personal care items, domestic merchandise products and fitness-related products, among others. Notably, companies are looking to fuel sales via targeted marketing. Moreover, a few companies witnessed growth in products that complement at-home beauty and grooming practices. Additionally, the pandemic served as an opportunity for companies to broaden brand lines and launch products with improved features.
Digitization Key to Growth: With the change in consumer shopping pattern and behavior, industry participants have been playing dual in-store and online roles. In this respect, the industry players have been directing resources toward digital platforms, accelerating fleet optimization and augmenting supply chain. In fact, companies’ initiatives to expand delivery options — curbside pickup or ship-to-home orders — and contactless payment solutions have been a boon amid the pandemic. Additionally, retailers are investing in renovation, improved checkouts and mobile point-of-sale capabilities to keep stores relevant. Markedly, the outbreak has rapidly changed the convenience of digitization into a necessity, and companies have been taking every step to capitalize on that demand. Keeping in mind consumers’ product preferences and growing inclination toward online shopping, retailers need to replenish shelves with in-demand merchandise and ramp up investments in digitization.
Focus on Margins: Companies in the industry are vying for a bigger share on attributes such as price, products and speed to market. They have been accelerating investments to strengthen digital ecosystem and boost shipping and delivery capabilities. While these endeavors drive sales, they entail high costs. Apart from these, any deleverage in SG&A rate, higher labor and occupancy costs, and increased marketing and other store-related expenses might build pressure on margins. Meanwhile, the impact of additional employee payments and benefits along with investments undertaken to preserve safety and health of customers and team members amid the coronavirus crisis cannot be ruled out. Markedly, Ulta Beauty, Inc. (ULTA) incurred additional COVID-related operating costs of about $188 million during fiscal 2020. Continued rise in such costs is likely to keep building pressure on the company’s margins. That said, sustained cost-containment measures are necessary to cushion margins.
Zacks Industry Rank Indicates Solid Prospects
The Zacks Retail – Miscellaneous industry is housed within the broader Zacks Retail – Wholesale sector. The industry currently carries a Zacks Industry Rank #110, which places it in the top 43% 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 encouraging 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. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually becoming more confident on this group’s earnings growth potential. Since the beginning of April, the industry’s earnings estimate for the current year has improved 0.8%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Vs Broader Market
The Zacks Retail – Miscellaneous industry has outperformed the broader Retail – Wholesale sector and the Zacks S&P 500 composite over the past year.
The industry has gained 61.2% over this period compared with the S&P 500’s rise of 58.5%. Meanwhile, the broader sector has rallied 41.1% in the said time frame.
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 23.88X compared with the S&P 500’s 23.29X and the sector’s 32.51X.
Over the last five years, the industry has traded as high as 24.86X, as low as 12.32X and at the median of 17.18X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
4 Retail – Miscellaneous Stocks to Keep a Close Eye On
Tractor Supply Company: The company seems well poised for growth, thanks to its robust business strategies. Here, the company’s “Life Out Here” and “ONETractor” strategies are worth a mention. Moreover, its omni-channel initiatives, including curbside pickup and same day delivery, bode well. Strength in everyday merchandise, including consumable, usable and edible products, has been fueling comparable store sales. Markedly, this largest rural lifestyle retailer in the United States has a trailing four-quarter earnings surprise of 9.4%, on average, and an estimated long-term earnings growth rate of 9%. The Zacks Consensus Estimate for its current-fiscal EPS has risen by a penny over the past 30 days. We also note that shares of this Zacks Rank #2 (Buy) company have risen 23.6% in the past six months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: TSCO
MarineMax: The company’s strategic investments in high-margin businesses such as finance, insurance, brokerage, marina and service operations bode well. Markedly, the acquisitions of Northrop & Johnson in July 2020 and Fraser Yachts in 2019 strengthened its position in the superyacht category. Last October last year, the company announced the buyout of SkipperBud’s and its affiliate, Silver Seas Yachts. The buyout has meaningfully enhanced MarineMax’s presence in the Great Lakes region and the West Coast of the United States. The company’s significant geographic reach and product diversification coupled with stellar demand are likely to fuel the top line. The company has been largely benefiting as consumers embrace and enjoy the boating lifestyle. Impressively, this recreational boat and yacht retailer has a trailing four-quarter earnings surprise of 99.9%, on average. Also, the Zacks Consensus Estimate for its current-fiscal EPS has moved up 0.9% in the past seven days. We also note that shares of this Zacks Rank #2 company have surged 65.4% in the past six months.
Price and Consensus: HZO
Five Below: The company’s focus on providing trend-right products, improving supply chain, strengthening digital capabilities and delivering better WOW products bode well. The company has been working on digitizing vendor transactions, implementing core merchandizing platform and rolling out cloud-based data and analytics platform to analyze demand, and accordingly manage inventory. To make shopping convenient, it is expanding self-checkout capabilities. Markedly, the company is now offering same-day delivery service in more than 350 locations in collaboration with Instacart. This extreme-value retailer for tweens and teens has a trailing four-quarter earnings surprise of 47.7%, on average, and an estimated long-term earnings growth rate of 32.8%. Also, the Zacks Consensus Estimate for its current-fiscal EPS has moved up by a penny in the past seven days. We also note that shares of this Zacks Rank #3 (Hold) company have surged 46.8% in the past six months.
Price and Consensus: FIVE
DICK'S Sporting Goods: Favorable customer demand, a solid product portfolio and strength in the online platform have been contributing to the company’s upbeat performance. The company has been capitalizing on the favorable shifts in consumer demand across golf, outdoor activities, home fitness and active lifestyle. Notably, the company has been undertaking technology enhancements to provide customers with seamless omni-channel experience. During the fourth quarter of fiscal 2020, e-commerce sales surged 57% on a year-over-year basis, while as a percentage of total net sales, the same increased to 32%. Impressively, shares of this sporting goods retailer have gained approximately 41.5% in the past six months. The Zacks Consensus Estimate for the company’s current-fiscal EPS has moved up 0.8% in the past 30 days. This Zacks Rank #3 company has a trailing four-quarter earnings surprise of 35.2%, on average, and an estimated long-term earnings growth rate of 5.6%.
Price and Consensus: DKS
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Ulta Beauty Inc. (ULTA) : Free Stock Analysis Report
Tractor Supply Company (TSCO) : Free Stock Analysis Report
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Five Below, Inc. (FIVE) : Free Stock Analysis Report
DICKS Sporting Goods, Inc. (DKS) : Free Stock Analysis Report
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