Retail Stocks: A Year In Review; What To Shop For In 2020

Person holding a bunch of shopping bags
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It goes without saying, the retail industry which has seen customer traffic plummet in traditional strongholds like malls and brick-and-mortar chains, continues to face numerous challenges. Take a look at this chart.

S&P 500 vs XRT

With a 12.81% rise in 2019, the SPDR S&P Retail ETF (XRT) has grossly underperformed the near 30% rise in the S&P 500 index. If we were to expand that timeline to, say, three years, the chart would depict the same story, that retail stocks have significantly underperformed the broader market during this decade. But not all retail is the same. And where there’s been an under-performance, typically, this would be a good place to look for opportunities.

Retailers that have adapted by building their own online businesses, developed an omni-channel strategy, while coming up with innovative ways to get customers into stores, have done well. Though there are tons of dead bodies to suggest that the pressure from e-commerce giant Amazon (AMZN) is real and not going away, the talks of the so-called "retail apocalypse" — which began a few years ago — have largely been exaggerated. The improvements of Walmart (WMT) (up 44% in 2019), Target (TGT) and Costco (COST) (up 44% in 2019) are perfect examples.

One year retail chart

With a better-than 95% rise in 2019, Target hit the bulls-eye on all of its operating metrics. Showing that big-box retail is not dead, Target’s strong stock performance has been driven by its e-commerce investments, including its acquisition of grocery delivery startup Shipt. Target’s tech-integrated stores, which have transitioned towards a more modern, dynamic look, is benefiting from the struggles of malls. And not only is Target crushing it on same-store sales, its online business is growing faster than both Walmart and Amazon.

Where other retailers have failed, yoga powerhouse Lululemon (LULU) (up 89% in 2019) is killing it. The company, which ended 2019 with eight straight earnings beats, is showing no signs of slowing down. The Athleisure category in particular is not just hot in the U.S., international growth has also gained momentum. And combined with the operational improvements new CEO Calvin McDonald has begun to make, which continues to deliver double-digit same-store sales growth, it would be a mistake to part with this winner now.

Costco is another stock to like in 2020. Costco’s earnings profile has made it a standout in retail over the past several years, with a business model that most analysts continue to praise. The nation’s largest warehouse retailer is still finding ways to grow its membership total and, at the same time, getting its club members to spend more. The stock has surged on the back of a double-digit percentage rise in net revenue, while same-store sales is expected to surpass Street estimates.

As with LULU, Nike shares have outperformed on the back of its e-commerce capabilities which the company sees as its key to posting strong growth in the years ahead. This strategy is paying off handsomely, evidenced by its 42% jump in online sales and a double-digit jump in Nike’s women’s business in the most-recent quarter. Goldman Sachs, which just added Nike to its “Conviction List”, sees Nike as positioned for “multi year growth, expansion in margins, and higher returns on invested capital.” When factoring its e-commerce momentum and supply chain improvements, Nike stock may yet be cheap despite trading at all-time highs.

All told, while the retail sector will continue to face disruption from e-commerce, the leaders will continue to stand out. What’s more, overall retail sales continue to grow — a trend analysts believe will continue throughout 2020. And given that the fact that consumers will always need to buy items like clothes, food, and furniture, investing in retail can continue to be profitable. The key is knowing how to spot bargains when they’re on sale and jumping on them.

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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Richard Saintvilus

After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.

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