4 Stocks to Watch From the Challenging Retail-Miscellaneous Industry

As stimulus-driven spending gradually wanes and interest rates remain elevated, the Retail – Miscellaneous industry is facing a crucial moment. Consumers are exercising caution with their disposable income. This change in consumer sentiment is impacting different merchandise categories, posing challenges for businesses. The recent report from the Labor Department revealed a 0.4% increase in the consumer price index for March. This has dashed hopes of any recent cut in benchmark interest rates.

Nonetheless, the industry participants are proactively addressing the changing consumer environment by emphasizing a superior product strategy, enhancing their omnichannel capabilities and making prudent capital investments. Backed by these initiatives, companies such as Tractor Supply Company TSCO, Ulta Beauty, Inc. ULTA, DICK'S Sporting Goods, Inc. DKS and Arhaus, Inc. ARHS are well-positioned to seize opportunities that may arise in this changed marketplace.

About the Industry

The Zacks Retail – Miscellaneous industry covers retailers of sporting goods, office supplies and specialty products and sellers of a wide range of domestic merchandise. It also includes retailers of beauty products providing cosmetics, fragrances, skincare and haircare products and salon styling tools. Some of the industry participants operate rural lifestyle retail stores, and art and craft specialty outlets and sell their products to farmers, ranchers and others, as well as tradesmen and small businesses. The industry also comprises recreational boat and yacht retailers and specialty value retailers offering a broad range of trend-right, high-quality merchandise targeted at tween and teen customers. The players' profitability depends on a prudent pricing model, a well-organized supply chain and an effective merchandising strategy.

4 Key Industry Trends

Cautious Consumer Environment: The industry grapples with a complex set of challenges as a soft demand environment casts a shadow on overall sales and revenue prospects. Consumers are contending with a host of economic issues, encompassing high inflation, elevated interest rates and geopolitical tension. This economic landscape prompts shifts in consumer behavior, potentially altering purchasing patterns across various retail segments.

Pressure on Margins to Linger: 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 the digital ecosystem and boost shipping and delivery capabilities. While these endeavors drive sales, they entail high costs. Apart from these, any deleverage in the SG&A rate, higher labor and occupancy costs, and increased marketing and other store-related expenses might build pressure on margins. Nonetheless, companies have been focused on undertaking initiatives to mitigate cost-related challenges. These include streamlining operational structures, optimizing supply networks and adopting effective pricing policies.

Focus on Boosting Portfolio & Market Reach: Most companies in the space are working on providing a wide assortment of products, enhancing the online experience and adopting a favorable pricing strategy to boost sales. Initiatives such as building omnichannel operations, coming up with reward programs and developing innovative products and services are worth mentioning. There has been an increase in demand for personal care items, domestic merchandise products and fitness-related products. Companies are looking to fuel sales via targeted marketing.

Digitization, Key to Growth: With the change in consumer shopping patterns 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 the supply chain. Companies’ initiatives to expand delivery options — curbside pickup or ship-to-home orders — and contactless payment solutions have been a boon. Additionally, retailers are investing in renovation, improved checkouts and mobile point-of-sale capabilities to keep stores relevant. Keeping in mind consumers’ product preferences and inclination toward online shopping, retailers are replenishing shelves with in-demand merchandise and ramping up investments in digitization.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Retail – Miscellaneous industry is housed within the broader Zacks Retail – Wholesale sector. The industry currently carries a Zacks Industry Rank #156, which places it in the bottom 38% 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 drab near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Since the beginning of December 2023, the industry’s earnings estimate has declined 16.7%.

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 underperformed the broader Retail – Wholesale sector and the Zacks S&P 500 composite over the past year.

The industry has declined 2.3% over this period. Meanwhile, the S&P 500 has risen 24.2%, and the broader sector has increased 27.6% 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 16.24X compared with the S&P 500’s 20.88X and the sector’s 22.44X.

Over the last five years, the industry has traded as high as 22.26X, as low as 10.97X and at the median of 16.54X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)


 

4 Stocks to Watch

Tractor Supply: Tractor Supply is positioned for growth, fueled by its unwavering commitment to the transformative "Life Out Here" strategy. Through strategic investments in initiatives like new store expansions and technological advancements, Tractor Supply has fortified its operational capabilities. Key efforts, such as the relaunch of the Neighbor's Club program and the expansion of its mobile footprint, underscore Tractor Supply's dedication to elevating customer experience and boosting revenues. With these strategic investments showing promising returns, Tractor Supply is primed to deliver considerable value to its shareholders.

Tractor Supply has a trailing four-quarter earnings surprise of 0.2%, on average. The Zacks Consensus Estimate for current financial-year revenues and EPS suggests growth of 3.1% and 1%, respectively, from the year-ago reported figure. Shares of this Zacks Rank #2 (Buy) company have risen 0.3% in the past year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: TSCO

Dick's Sporting Goods: The company is positioned for growth due to its strategic investments aimed at driving profitable, organic expansion. With plans to increase capital investment, Dick's Sporting Goods is prioritizing initiatives such as store growth, relocations and enhancements to existing stores, alongside continued investments in technology and supply chain expansion. Particularly noteworthy is the success of the House of Sport concept stores, which are generating strong returns and reflecting solid demand for sporting goods. These positive outcomes are attributed to the company's diverse product assortment, pricing strategies and omnichannel capabilities.

Dick's Sporting Goods has a trailing four-quarter earnings surprise of 3.1%, on average. The Zacks Consensus Estimate for current financial-year revenues and EPS suggests growth of 1.3% and 2.9%, respectively, from the year-ago reported figure. Shares of this Zacks Rank #2 company have jumped 41.6% in the past year.

Price and Consensus: DKS

Ulta Beauty: The company has been strengthening its omnichannel business and exploring the potential of both physical and digital facets. It has been implementing various tools to enhance guests' experience, like offering a virtual try-on tool and in-store education and reimagining fixtures, among others. Ulta Beauty focuses on offering customers a curated and exclusive range of beauty products through innovation.

This beauty retailer and a premier beauty destination for cosmetics, fragrance, skincare products, hair care products and salon services has a trailing four-quarter earnings surprise of 3.4%, on average. The Zacks Consensus Estimate for current financial-year revenues and EPS suggests growth of 5.5% and 2.8%, respectively, from the year-ago reported figure. Shares of this Zacks Rank #3 (Hold) company have fallen 18.9% in the past year.

Price and Consensus: ULTA

Arhaus: Strong demand, successful product launches, showroom expansions and geographic diversification collectively serve as robust pillars for Arhaus’ current success and future growth prospects. The company places a paramount focus on enhancing the client experience, with plans to augment its capabilities by hiring additional in-home designers and optimizing the final-mile delivery process.

This lifestyle brand and omnichannel retailer of premium home furnishings has a trailing four-quarter earnings surprise of 25.3%, on average. The Zacks Consensus Estimate for current financial-year revenues suggests growth of 5.3% from the year-ago reported figure. This Zacks Rank #3 stock has rallied 82.9% in the past year.

Price and Consensus: ARHS

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Zacks Investment Research

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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