Retailers are overhauling their operations as technology redefines the shopping experience. Still, secular trends are working against their favor as e-commerce continues to take share from brick and mortars. This puts retail stocks in a tough spot, and over the past six months, the industry has pulled back by 9.1%. This drawdown is a far cry from the S&P 500’s 3.1% ascent.
Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. With that said, here is one resilient consumer stock at the top of our shopping list and two that may face trouble.
Two Consumer Retail Stocks to Sell:
Dillard's (DDS)
Market Cap: $9.34 billion
With stores located largely in the Southern and Western US, Dillard’s (NYSE: DDS) is a department store chain that sells clothing, cosmetics, accessories, and home goods.
Why Are We Wary of DDS?
- Lack of new stores suggest it’s attempting to increase revenue at existing locations because demand is sluggish
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
- Performance over the past three years shows each sale was less profitable as its earnings per share dropped by 10.4% annually, worse than its revenue
Dillard's is trading at $597.65 per share, or 18.4x forward P/E. Read our free research report to see why you should think twice about including DDS in your portfolio.
Target (TGT)
Market Cap: $54.68 billion
With a higher focus on style and aesthetics compared to other large general merchandise retailers, Target (NYSE: TGT) serves the suburban consumer who is looking for a wide range of products under one roof.
Why Are We Out on TGT?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
- Gross margin of 28% is below its competitors, leaving less money for marketing and promotions
- Subpar operating margin of 5.1% constrains its ability to invest in process improvements or effectively respond to new competitive threats
At $120.75 per share, Target trades at 15x forward P/E. If you’re considering TGT for your portfolio, see our FREE research report to learn more.
One Consumer Retail Stock to Watch:
Sprouts (SFM)
Market Cap: $7.21 billion
Playing on the secular trend of healthier living, Sprouts Farmers Market (NASDAQ: SFM) is a grocery store chain emphasizing natural and organic products.
Why Could SFM Be a Winner?
- Fast expansion of new stores to reach markets with few or no locations is justified by its same-store sales growth
- Comparable store sales rose by 7.5% on average over the past two years, demonstrating its ability to drive increased spending at existing locations
- Projected revenue growth of 8.1% for the next 12 months suggests its momentum from the last three years will persist
Sprouts’s stock price of $77.31 implies a valuation ratio of 14x forward P/E. Is now a good time to buy? Find out in our full research report, it’s free.
Stocks We Like Even More
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