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3 Top Retail Stocks to Buy in August

Smiling young woman brandishes several shopping bags on a sun-soaked city street.

The summer is winding down. At the end of the back-to-school swing, retailers across America are starting to gear up for this year's holiday season. Investors can find plenty of tempting buys in the retail sector right now, so we asked a handful of contributors to The Motley Fool for their best ideas in the sector today.

Read on to see why our panelists recommend household names Target (NYSE: TGT) , The Children's Place (NASDAQ: PLCE) , and Party City (NYSE: PRTY) right now.

Smiling young woman brandishes several shopping bags on a sun-soaked city street.

Image source: Getty Images.

Party on with Party City

Rich Duprey(Party City): Celebrations retailer Party City is moving into the time of year that is its wheelhouse. Although it operates some 880 stores nationwide selling party supplies year-round, it's the fall season when it comes into its own.

Beginning in September, it opens several hundred pop-up stores that will operate for just two months before closing again that cater to the Halloween holiday. So popular are its stores that the sales from its Halloween City chain account for one-fifth of the total.

This year, though, it is adding a new concept to the mix, Toy City, which is an attempt to cash in on the demise of Toys R Us. While there will only be around 50 pop-up stores opened this year, it is obviously a concept that can expand. And because it will be locating these Toy City stores near its Halloween City ones, there could be a nice crossover of customers between the two.

Of course, there are a lot of retailers hoping to make a splash in toys, from Walmart and Amazon.com to KB Toys and F.A.O. Schwartz, both of which are trying to make a comeback from bankruptcy. KB Toys is also exploring the pop-up store route, and it even consulted with Party City before reorganizing itself.

Party City trades at just 14 times trailing earnings and only around eight times next year's estimates, while it's valued at a deeply discounted eight times its free cash flow. Despite its stock being up 14% year to date, iParty City is an undervalued retailer, and its stock would be a perfect buy this month.

The weather outside isn't frightful anymore

Anders Bylund (Children's Place): The kid-focused clothing retailer has seen a healthy uptrend in recent years. On the heels of several years with falling profits, stagnant revenue growth, and range-bound share prices, the company came back to life in 2016. Over the last three years, Children's Place has lifted its revenues 10% higher while EBITDA profits showed a 49% increase. Share prices followed suit for a while, landing the three-year return at 120%.

Most of these gains fell in 2016 and 2017, though. So far in 2018, Children's Place investors have taken a 12% haircut -- and not necessarily for the right reasons.

The company did fall short of analyst targets and its own guidance in the first quarter, sending share prices 8% lower in a hurry . Management cited unseasonably cold weather as the main reason behind that disappointing showing, forcing Children's Place to use generous discount promotions in order to clear out inventories that seemed designed for a different season.

But Children's Place did not lower its longer-term goals. By fiscal year 2020, management hopes to have doubled the adjusted operating margin to 12% and to deliver full-year earnings of $12 per share. The current annual run-rate for earnings stands at $7.83 per share.

Give the market some time to forget about the harsh winter that passed, because the business as a whole looks remarkably strong today. That's why Children's Place is a strong buy at this particular moment, just ahead of Wednesday's second-quarter report that should show the benefits of a warm American summer.

Target's bullseye logo, red on white with the company name below the image.

Image source: Target.

Making all the right moves

Jeremy Bowman (Target): With retail earnings season right around the corner, one stock that could be poised to pop is Target. The big-box chain has been making all the right moves lately, and the stock has been rewarded, rising 26% year to date and 43% over the last year.

Target has been making improvements on both the offline and online fronts. Its acquisition of Shipt late last year will help it boost its delivery capabilities, and the company is now offering same-day delivery for groceries and other goods in select markets. The move will help it challenge Amazon 's Prime Now offering, which it's now using to deliver from Whole Foods.

Meanwhile, Target is expanding small-format stores in cities and college towns, bringing it closer to customers who don't have access to groceries and the other kinds of broad-range merchandise that Target offers. With its cheap chic brand, the retailer occupies a unique space in the market, separating it from rivals like Walmart and Costco as well as Amazon.

Its recent results have shown that those initiatives, including higher employee wages, have paid off. The company reported a 3.7% increase in traffic in its most recent quarter, its fastest growth in 10 years, leading to 3% growth in comparable sales. Digital sales, meanwhile, increased 28%, and earnings per share were up 9.4%. The retailer also reported its biggest online shopping day of the year when it launched a rival sale on Prime Day, showing that its e-commerce offering continues to resonate with customers.

The stock is still affordable, at a P/E of about 17, and it offers a dividend yield of 3.1%. There's good reason to believe the stock could move higher when it reports second-quarter earnings later this month.

10 stocks we like better than Target

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*Stock Advisor returns as of August 6, 2018

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Anders Bylund owns shares of Amazon. Jeremy Bowman has no position in any of the stocks mentioned. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Costco Wholesale. 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.


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

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