Markets

Miscellaneous Retail Industry Outlook: Margin Woes to Nag

The Zacks Retail – Miscellaneous industry covers retailers of sporting goods, office supplies, and specialty products, 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 outlets, and even provide used car auction and salvage auction services. The prominent names in the industry are Ulta Beauty, Inc. (ULTA), Tractor Supply Company (TSCO), Bed Bath & Beyond Inc. (BBBY) and DICK'S Sporting Goods, Inc. (DKS).

Let’s take a look at the industry’s three major themes:

  • The industry’s prospects are correlated with the purchasing power of consumers. In fact, a sturdy job market and decent wage gains are encouraging consumers to spend more. Notably, the metric rose at a 2.9% annualized rate during the third quarter of 2019. Again, U.S. retail sales rebounded in October, increasing 0.3%, per the Commerce Department. No wonder, a few industry players have been on a tear. Moreover, continued restructuring and expansion initiatives, including store openings and enhancement of distribution centers, should improve the performance of industry constituents. Unwavering focus on boosting store transactions should also push companies’ comparable store sales higher.
     
  • Most companies in the space are working on providing a wide assortment of products, enhancing in-store and online experience, and adopting a favorable pricing strategy 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 pursuing buyouts are worthy of mention. The companies are also looking to curtail costs, lower risks in supply chain management, boost sales via targeted marketing and optimize business processes.
     
  • The brick-and-mortar retail business, which is the model for most companies in the Zacks Retail – Miscellaneous industry, has turned highly competitive since Amazon (AMZN) gained dominance over all the business areas and altered the way consumers shop. With the evolving shopping patterns, a significant number of players have been making higher investments to bolster their omnichannel operations. To that end, they are constantly into digital innovation alongside 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 compress margins. Again, the imposition of tariffs due to the U.S.-China trade war might hurt the near-term results of some companies in this industry.

Zacks Industry Rank Indicates Dismal Prospects

The Zacks Retail – Miscellaneous industry is a 14-stock group within the broader Zacks Retail – Wholesale sector. The industry currently carries a Zacks Industry Rank #147, which places it in the bottom 42% 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 the year, the industry’s earnings estimate for the current year has moved down approximately 10%.

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

The industry has declined 11.6% over this period compared with the S&P 500 Index’s gain of 17.4% and the broader sector’s increase of 17.1%.

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 13.12X compared with the S&P 500’s 17.99X and the sector’s 24.32X.

Over the last five years, the industry has traded as high as 20.29X, as low as 12.70X and at the median of 15.07X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

 

Bottom Line

A few companies in the industry are resorting to location analytics and other data-driven tools to better engage with customers. Such efforts along with pricing mechanism, inventory management, wider range of products and other operational initiatives should support sales. However, deleverage in the SG&A rate, rising rents and higher operating costs might dent margins.

That said, we are presenting three stocks from the Retail – Miscellaneous space that are well positioned to capitalize on the above-mentioned opportunities. All the three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Hibbett Sports, Inc. (HIBB): For this retailer of athletic-inspired fashion products, the consensus EPS estimate for the current fiscal has remained stable over the last 30 days. The stock has surged roughly 71% in the past three months. The company has an estimated long-term earnings growth rate of 10.9%. Moreover, the company’s bottom line has outperformed the Zacks Consensus Estimate by 12.1% on average in the trailing four quarters.

Price and Consensus: HIBB

 

Office Depot, Inc. (ODP): For this provider of business services and supplies, products, and technology solutions, the consensus EPS estimate for the current fiscal year has risen by a penny over the last seven days. Moreover, the company’s bottom line has outperformed the Zacks Consensus Estimate by 19.1% on average in the trailing four quarters. The stock with an estimated long-term earnings growth rate of 11.1% has gained roughly 69% in the past three months.
 
Price and Consensus: ODP

 


The Michaels Companies, Inc. (MIK): For this operator of arts and crafts specialty retail stores, the consensus EPS estimate for the current fiscal year has remained stable over the last 30 days. Moreover, the company’s bottom line has outperformed the Zacks Consensus Estimate by 11.4% on average in the trailing four quarters. The stock with an estimated long-term earnings growth rate of 7% has gained roughly 58% in the past three months.

Price and Consensus: MIK

 


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Ulta Beauty Inc. (ULTA): Free Stock Analysis Report

Tractor Supply Company (TSCO): Free Stock Analysis Report

Office Depot, Inc. (ODP): Free Stock Analysis Report

The Michaels Companies, Inc. (MIK): Free Stock Analysis Report

Hibbett Sports, Inc. (HIBB): Free Stock Analysis Report

DICK'S Sporting Goods, Inc. (DKS): Free Stock Analysis Report

Bed Bath & Beyond Inc. (BBBY): Free Stock Analysis Report

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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.

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