Markets
BBY

2 Retail Stocks Poised for a Bull Run

There is no doubt that the retail industry is going through a rough patch. The public is battling the coronavirus pandemic, which caused governments to issue stay-at-home orders, and a resurgence of cases has many states pausing or rolling back reopening plans. With the U.S. already in a recession, this does not bode well for the overall sector.

There are bright spots, however, even in these difficult times. Let's review a couple of retailers that should do well and reward shareholders with stock prices that should follow.

The word "BULLISH" is spelled out in blocks with stock charts in the background.

Image source: Getty Images.

1. Best Buy

Best Buy (NYSE: BBY) adjusted its business in the middle of its fiscal first quarter 2021 (covering the period ended May 2). After widespread stay-at-home orders began in mid-March due to the coronavirus pandemic, the company shifted to permitting curbside pickup only. Best Buy fared better than many retailers, with sales dropping about 20% in the back half of the quarter compared to the year-ago period.

This quarter's same-store sales (comps) were down 5.3%. However, Best Buy has posted annual comps increases for several years, including 2.1% last year. With workers and students moving to a remote platform, the company is in a strong position to reap the rewards from its product and service offerings. Hence, this quarter is likely an aberration.

The retailer offers a range of products, such as computers, mobile phones, and appliances. But what really differentiates Best Buy are the services it provides, notably through its famed "Geek Squad," including installation, repairs, and tech support. The company's Total Tech Support program provides unlimited support for about $200 per year.

Best Buy has been working on supply chain initiatives for some time, which are allowing customers to receive their goods faster, including online ordering and store pickup. Its fast delivery times and service offerings give Best Buy a leg up over online competitors like Amazon.com (NASDAQ: AMZN).

Shareholders also benefit from the company paying a dividend, and its yield is 2.6%.With a 38% payout ratio, this appears secure.The stock's trailing price-to-earnings ratio is 16, making the shares relatively inexpensive compared to the S&P 500's 23 times.

2. Ross Stores

Ross Stores' (NASDAQ: ROST) share price is about 30% below its late-February level. While this doesn't necessarily mean the stock is a bargain, in this case, it appears like it is a compelling buying opportunity.

For starters, the pandemic forced Ross to close all of its stores during its fiscal first quarter (ended May 2). Without a major online presence, this hurt the company's sales, which fell more than 50% versus the prior year, from $3.8 billion to $1.8 billion. It lost about $306 million compared to a $421 million profit.

The company started opening up stores in mid-May, with about 700 available to the public out of its more than 1,800 locations.

Its plans were to open more, which is good news since its customers visit the stores to hunt for bargains. Its physical stores are important to the shopping experience. With coronavirus cases reappearing, however, the company's reopening plans may stall or even take a step backward. This would hurt Ross' results in the near term.

However, over the longer term, Ross should benefit during the economic downturn thanks to the two brands it operates. Ross Dress for Less, an off-price apparel and home fashion retailer, offers name brand and designer goods at a 20% to 60% discount to department and specialty retailers. Ross' second brand, dd's Discounts, has more moderately priced merchandise, offering 20% to 70% off comparable department and discount stores.

During a soft economy, the company has greater opportunities to purchase closeout merchandise (manufacturer overruns and canceled orders from retailers). This gives a greater selection of goods to shoppers.

In the last recession, Ross' fiscal 2008 and 2009 comps rose 2% and 6%, respectively. Its 2009 earnings were $443 million, 70% higher than 2007's $261 million.

Sooner or later, retail stores will fully open, and Ross will no doubt benefit when it happens. With the stock selling at a depressed level, this looks like a good opportunity for bargain shoppers.

10 stocks we like better than Best Buy
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now… and Best Buy wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

 

*Stock Advisor returns as of June 2, 2020

 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool has a disclosure policy.

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

In This Story

BBY ROST AMZN

Latest Markets Videos

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More