Miscellaneous Retail Industry Outlook: Margin Woes to Continue

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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 directly correlated with the purchasing power of consumers. And a robust job market and higher disposable income have made consumers more confident now 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 also boost revenues of the industry constituents.
  • 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.
  • 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 arenas as well as altering the way consumers shop. With the evolving shopping patterns, a significant number of players have been making heavy investments to strengthen 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 Dismal 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 #155, which places it in the bottom 39% 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 gloomy 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 bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group's earnings growth potential. Since the beginning of February this year, the industry's earnings estimate for the current year has gone down by approximately 9%.

Despite the industry's drab near-term prospects, we will present few stocks that have the potential to outperform the market. But before that 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 21.2% over this period compared to the S&P 500 index's gain of 8.3% and broader sector's increase of 16.4%.

One-Year Price Performance

Industry's Current Valuation

On the basis of forward 12-month Price-to-earnings (P/E) ratio, which is commonly used for valuing retail stocks, the industry is currently trading at 13.94X compared with the S&P 500's 16.41X and the sector's 22.49X.

Over the last five years, the industry has traded as high as 25.65X, as low as 13.15X, with the median at 18.60X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

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.

None of the stocks in the Retail - Miscellaneous space currently hold a Zacks Rank #1 (Strong Buy). However, we are presenting three stocks with a Zacks Rank #2 (Buy) that are well positioned to capitalize on the opportunities. You can see the complete list of today's Zacks #1 Rank stocks here .

Five Below, Inc. (FIVE): For this specialty value chain retailer, the consensus EPS estimate for the current fiscal year has remained stable over the last 30 days. This Zacks Rank #2 stock has more than doubled over the past year. The company has an estimated long-term earnings growth rate of 30%. It has an average positive earnings surprise of 14.8% for the trailing four quarters.

Price and Consensus: FIVE

Tractor Supply Company (TSCO): This Zacks Rank #2 stock has gained roughly 51% in a year. The consensus EPS estimate for this company has improved by a penny over the last seven days. The operator of rural lifestyle retail stores has an estimated long-term earnings growth rate of 12.8%. The company has an average positive earnings surprise of 3.4% for the last four quarters.

Price and Consensus: TSCO

DICK'S Sporting Goods, Inc . (DKS): This Coraopolis, Pennsylvania-based full-line sporting goods retailer has gained 28% in a year. The Zacks Consensus Estimate for the company's current fiscal EPS has been stable in the last 30 days. The company has an estimated long-term earnings growth rate of 7%. The company delivered an average positive earnings surprise of 18.2% in the trailing four quarters.

Price and Consensus: DKS

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Investing Ideas , Stocks
Referenced Symbols: TSCO , FIVE , DKS , AMZN

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