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Retail Sales Are Up. Is Now the Time to Buy Retail Stocks?

The retail apocalypse that has marked much of this century has mostly run its course. While many retailers kept going (often undergoing drastic changes) and some didn't survive, most have adapted to the new normal and now have omnichannel operations in place.

But succeeding with a new business model didn't manage to prevent COVID-19 from devastating sales for many in 2020, even at leading retail companies like Nike and Nordstrom. Restaurants didn't fare better either, with the likes of Starbucks and McDonald's still recovering from closed dining rooms. A few retail categories did benefit from sales growth during the pandemic, such as general retailers like Walmart and Target (NYSE: TGT), and home improvement operations like Home Depot (NYSE: HD) and Lowe's (NYSE: LOW).

Recent economic indicators suggest things might be changing. The Census Bureau's preliminary September retail sales report released last week shows a 1.9% increase in retail sales from the August report and a 5.4% increase from the same month last year. As the holidays approach (and the most active retail season of the year), what does this mean for retail stocks and investors in those stocks?

Woman holding shopping bags in a mall.

Image source: Getty Images.

Retail categories that are heating up

One of the surprises in the retail report was an 11% increase in clothing sales. That's great news for Nike, the leading U.S. apparel company.

Gap (NYSE: GPS) should also benefit from this news. CEO Sonia Syngal took over as CEO in February and so far has lifted the company out of a multi-year rut, turning it around from not being able to pay rent on stores to a more reasonable 18% sales decline (especially given te pandemic conditions) in the second quarter (ending July 31). The quarter also showed a 13% comps increase, which will help fuel sales in the third quarter.

Macy's (NYSE: M) is still suffering strong declines, but sales are creeping up. The holiday season will be an important indicator of how the company is progressing, and CEO Jeffrey Gennette said, "We had a successful gifting strategy for [the holiday retail season] of 2019 and we're building on that for 2020."

American Eagle Outfitters (NYSE: AEO) should be another winner of higher retail spending. Sales for its Aerie division, which markets women's intimates, surged 32% even during the pandemic. Sales for its namesake brand slowed down 26%, but higher overall retail spending is likely to raise it.

Retail categories that are cooling down

Home improvement was only up 0.6% in September, according to the report, but it's still 19% higher year over year. Home Depot and Lowe's, the largest U.S. home improvement chains, saw substantial gains in the second quarter. This phenomenal growth may slow down now that shoppers are allocating their resources to other categories.

Luxury home goods retailer RH (NYSE: RH), on the other hand, saw a more mild 4% sales rise in the second quarter. Total company demand at RH (formerly Restoration Hardware) increased 16% year over year and was trending to 37% in September, and the company is expecting long-term year-over-year growth of 8% to 12%.

As the holiday season approaches

Most retailers expect their sales to keep climbing, and they're pulling out all of the stops for the coming holiday season, typically the highest revenue-grossing quarter. A Deloitte report forecasts a 1% to 1.5% year-over-year increase in retail spending over the holiday season, from November through January. It also sees a 25% to 35% increase in e-commerce over the season, and retailers are gearing up with improved omnichannel features.

Bed, Bath & Beyond (NASDAQ: BBBY), whose revenue was falling even before the pandemic partially due to an outdated e-commerce program, scored a big win in its second quarter with a 6% comps increase after four years of declines, powered by an 89% rise in e-commerce sales.Shares are now up 45% year-to-date. Target had its highest-ever comps rise in the second quarter at 24%, with a 195% increase in digital sales, and will likely continue to see higher sales from customers who appreciate its strong omnichannel options.

Virtually all retailers will benefit from the uptick in spending coinciding with the beginning of the holiday season. But as second and third waves of coronavirus cases have hit several states, further restrictions on public gatherings may hamper some businesses' recovery efforts. Declines may show improvement, but they're unlikely to turn positive for many of the retailers who have suffered through COVID-19.

So, should you invest in retail stocks now? Yes. Just choose carefully.

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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Home Depot, Nike, and Starbucks. The Motley Fool recommends Lowe's and RH and recommends the following options: short November 2020 $85 calls on Starbucks. 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.

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