By Brett Owens
aEURoeBrett, I bought something for the girls. From CarteraEURtms. Let me know when you get it.aEUR
My mom thinks that postal delivery is a 50-50 proposition. She hedges her downside by purchasing 4X as many clothes as my young daughters actually need!
aEURoeMom aEUR" thanks. Will do. And, you know, theyaEURtmre probably good on dresses for now. TheyaEURtmll be up another size in a few months.aEUR
aEURoeOh donaEURtmt you worry about that. IaEURtmve got plenty of coupons,aEUR she countered.
My folks live 2,562 miles from their granddaughters. And while long-distance grandparenting can be a challenge, the (increasingly online) experience provided by CarteraEURtms ( CRI ) satisfies two of my momaEURtms favorite pastimes:
- Spoiling grandkids, and
As much as I appreciate the wardrobe help, the reason you and I are discussing infant and toddler clothing today is that these purchases are powering remarkable payout growth.
In 2018, every aEURoebrick and mortaraEUR business must have an aEURoeAmazon storyaEUR to explain why it wonaEURtmt be eaten up. A few sentences explaining aEUR" succinctly and convincingly aEUR" why the firm wonaEURtmt be swallowed alive by Amazon.com ( AMZN ) in the years ahead.
Our favorite retail stocks tend to be, well, hidden from Jeff BezosaEURtm view. The legendary CEO has different investing criteria from you and me. He needs to make big bets. His firm, after all, is Amazonian aEUR" it takes large splashes to move his sales tide higher.
So while heaEURtms busy mowing down the mainstream retail landscape, there are many niche retailers who will not only survive, but even thrive as e-commerce continues to boom in the years ahead. And they will all share two important characteristics:
- A direct relationship with their customers.
This is what failing department stores like MacyaEURtms ( M ) are missing. You walk into the store, you pay and you walk out. Their main sales interaction is purely transactional.
And in 2018, transactional is not enough. Firms built to sell in the decade ahead also have:
- A deep aEURoeonline connectionaEUR with consumers.
They have a website that is aEURoegrandma friendlyaEUR to take orders directly. They have a mobile app on their customersaEURtm smartphones aEUR" which they can use to buy more stuff from. They have an email address so that they can advertise the next sale.
And they have friendly service reps who will take the phone call when a package is late or missing aEUR" which will assure the customer will continue to buy direct from them instead of a black box like Amazon.
I love a handful of retail stocks right now, but IaEURtmm also concerned about a couple high-yield bets that are at risk of being aEURoeBezosaEURtmd.aEUR LetaEURtms look at these five retail stocks yielding up to 10.4% and separate the winners from the losers.
Best Buy ( BBY )
Dividend Yield: 2.6%
Best Buy ( BBY ) is the little engine that wouldnaEURtmt die. Market pundits left this retailer for dead years ago, thinking it couldnaEURtmt possibly survive the war on two fronts aEUR" big-box retailers Walmart ( WMT ) and Target (TGT) on the left, and Amazon on the right.
But CEO Hubert Joly aEUR" acting almost like a photo negative of SearsaEURtm Eddie Lampert aEUR" focused on improving the quality of stores, and used employee expertise to help battle the aEURoeshowroomingaEUR phenomenon that many believed would sink Best Buy. The result? A return to growth on the top and bottom lines.
Joly isnaEURtmt done throwing punches, either.
Best Buy is going aEURoelow-techaEUR in a grab at Toys aEUR~RaEURtm UsaEURtm customers, announcing it will expand its toy inventory in 1,000 stores this holiday season. Adding Nerf guns and Hatchimals is actually somewhat of a natural fit for BBY, which already sells the likes of video games and drones.
And investors have to love what Best Buy is doing on the income front. Joly has really put the pedal down on the payout , rewarding faithful investors with a 21% dividend hike in 2017 and a whopping 32% payout increase announced in March of this year.
Best Buy ( BBY ): A Near-Dividend-Doubler in Just Three Years!
L Brands (LB)
Dividend Yield: 7.4%
L Brands (LB) , the company behind iconic brands VictoriaaEURtms Secret and Bath & Body Works, has a dividend yield that puts most of the retail sector to shame.
And thataEURtms about it.
L BrandsaEURtm high yield is entirely a result of its bleeding shares, which have nearly halved in value this year. The dividend hasnaEURtmt budged for years, in large part because of shrinking profits as its brands lose their luster, especially among increasingly important Millennial wallets. The formerly premium-priced lingerie dealer has been forced to slash prices to compete, cramping margins and eroding its once prestigious brand. It also has been forced to put the ax to Henri Bendel, finishing off the fashion brand after 123 years of operations aEURoeto improve company profitability and focus on our larger brands that have greater growth potential.aEUR
The companyaEURtms second-quarter report made income investors do a double-take. L Brands significantly stepped down its full-year profit guidance, from $2.70-$3.00 to $2.45-$2.70. See, LB pays out $2.40 annually in dividends, so it would barely be covering its payout if profits come in at the low end of guidance. A special dividend aEUR" a pretty regular occurrence at L Brands aEUR" is almost certainly out of the question this year.
DonaEURtmt expect the Christmas season to turn around the long-term decay here, but do start expecting a dividend cut in the next couple years .
Dividend Yield: 2.9%
WhataEURtms an industrial real estate investment trust (REIT) got to do with the holiday season?
Everything, when youaEURtmre talking about AmazonaEURtms largest landlord.
Prologis (PLD) is a warehouse-focused REIT that boasts 771 million square feet across 3,742 buildings in 19 countries on four continents.
The shift to e-commerce directly benefits Prologis, whose properties are increasingly necessary for any retailer shifting their goods from brick-and-mortar stores to warehouses, where theyaEURtmll sit until delivery. And this is a rapid shift, with the company and Goldman Sachs estimating 152% projected growth of e-commerce sales between 2015 and 2020.
E-Commerce Sales Are Exploding
You can see this potential in PrologisaEURtm tenant lineup. Amazon is a major presence, at 16 million square feet as of last year, and Walmart and Best Buy are among other retail customers. But other major tenants include delivery companies such as UPS (UPS) , FedEx (FDX) and DHL aEUR" more e-commerce beneficiaries.
Prologis has its hand in a lot of other pies, too aEUR" 5,500 customers, to be specific, also including companies such as BMW, PepsiCo (PEP) and even the U.S. government.
The REIT doubled down on its opportunity earlier this year when it acquired rival DCT Industrial Trust for $8.4 billion, adding 71 million square feet of space on the East and West Coasts. That, and AmericansaEURtm growing love affair with online ordering, makes it all the more likely that PLD will continue growing both its bottom line and its dividend, which have been exploding for years.
Home Delivery Is Making Prologis (PLD) Shareholders Rich
Dividend Yield: 10.4%
GameStop (GME) would seemingly have it made right now. The Nintendo (NTDOY) Switch is selling like hotcakes, SonyaEURtms (SNE) early-year PlayStation 4 sales were ahead of projections and NPD Group says Xbox One sales have doubled from 2017. Take-Two InteractiveaEURtms (TTWO) Red Dead Redemption 2 did $725 million retail in just three days, prompting the company to call it aEURoethe single-biggest opening weekend in the history of entertainment,aEUR as it actually beat out DisneyaEURtms (DIS) Avengers: Infinity WaraEURtms opening-weekend box office.
Video games are doing great.
GameStop is not.
The companyaEURtms last quarterly results, out in September, included smaller revenues and a net loss of $24.9 million that was wider than the year-ago period; adjusted profits of 8 cents per share missed the mark, too. All told, sales should decline 2% to 6% this year.
GME is still making enough of a profit to comfortably cover its dividend, by almost double. But management tipped its hand at its own problems earlier this year by keeping the payout flat after years of token improvements.
This is ominous. If GameStop canaEURtmt catch a break while console sales are red-hot, itaEURtms going to be staring at an enormous problem when the console cycle slows down again, and as more game purchases are done online.
Packaging Corporation of America (PKG)
Dividend Yield: 3.4%
Packaging Corporation of America (PKG) is another non-retailer that you can nonetheless leverage to profit off the rise of e-commerce.
Packaging Corp offers a laundry list of solutions, from corrugated containers to retail packaging and displays to storage boxes to packaging supplies and so, so much more. And if all of that sounds like the kind of products that are going to be in high demand during the busiest time of the year for online retailers aEUR