Thanks to America’s post-lockdown economic recovery and Generation Z’s experiential shopping habits, brick-and-mortar retail stocks are back on the rise.
News of traditional brick-and-mortar retail’s demise has been greatly exaggerated. While there has been a significant decline in the number of storefronts for several major retailers, the shop-in-person experience is still alive and well. Here we’ll look at some well-known stores with a physical presence that are in fine shape and poised to outperform in the upcoming holiday shopping season. In fact, these brick-and-mortar retail stocks are already trending upward.
Many a dirge has been sung to the traditional storefront, and this year’s COVID-related shutdowns have seemingly put the final nail in the coffin for retail outlets. Appearances can be deceiving, however. Indeed, despite suffering some catastrophic setbacks this year, retailers are still finding ways to attract customers to the in-person shopping experience.
Industry analyst Ran Ben-Yair of TotalRetail has observed that shoppers still value a store’s physical presence as an opportunity to window shop or check out products they’ve heard about or seen online. Moreover, according to Ben-Yair:
“Gen Z prefers to experience products and test them out in person to see if they’re the right fit for them before making a purchase.”
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The love of storefronts by the younger generation has been well documented, with some analysts even making the claim that Gen Z may well revive the obsolete shopping mall (which they reportedly view as an escape from everyday reality). Marketing agency Consumer Clarity has also affirmed that Gen Z members may indeed be helping to revive mall shopping, noting that retailers that customize experiences geared toward members of this demographic are more likely to survive the so-called “retail apocalypse.”
While many retail stores were hard hit by harsh business conditions in the first quarter, publicly traded consumer discretionary retailers have, in the aggregate, recovered much of the ground they lost during the Q1 shutdowns. Putting into perspective how well the overall discretionary retail stocks have performed is the following graph, which compares the SPDR S&P Retail ETF (XRT) to the benchmark S&P 500 Index (SPX).
As you can see, the relative strength of the major retail stocks in recent months has been quite impressive. The forward momentum (both technically and fundamentally) that many retail companies have generated is especially encouraging as we enter the most important part of the year for most retailers.
With that in mind, let’s examine some established retail chains whose efforts at adapting to, and innovating in light of, the current economic climate are yielding fruit. In particular, we’ll focus on companies that are well positioned to experience higher sales during the fourth-quarter holiday sales season (the make-or-break period for many retailers).
3 Brick-and-Mortar Retail Stocks to Buy
Brick-and-Mortar Retail Stock #1: Best Buy (BBY)
Consumer electronics retailer Best Buy (BBY) is an example of a nationwide box store that has done an excellent job of quickly adjusting to this year’s shifting economic winds. The company responded rapidly to lockdowns by rolling out a successful curbside pickup service, retaining over 80% of its 2019 sales in the March quarter despite the turbulent business environment. Best Buy has allowed shoppers back in its stores since May, and the firm reported that sales were up approximately 20% in the first three weeks of Q3.
While online revenue has been even higher (up nearly 175% in the first three weeks of August), an in-house survey found that 97% of its customers felt good about the company’s safety measures. There’s good reason to believe this customer goodwill can translate into higher in-store sales during the upcoming holiday shopping season. Analysts are optimistic, with the consensus predicting continued top- and bottom-line growth in the next three quarters.
Brick-and-Mortar Retail Stock #2: Williams-Sonoma (WSM)
Williams-Sonoma (WSM) is known for its high-end kitchen wares and home furnishings. Although it was severely hit by the initial wave of lockdowns in the first quarter after closing all its U.S. and Canadian stores for several weeks, it has since posted a remarkable comeback. Online sales drove results in the June quarter (up 46%), but physical locations performed better than expected and improved throughout the quarter as stores reopened.
Pre-COVID, the company was doing exceptionally well and outperforming most of its peers, logging an average 6% annual revenue growth in revenues and per-share earnings growth of 11% in the past decade (with much of that growth occurring since 2018). Growth has since resumed, with a Q2 net revenue increase of 9%, including a sequential and year-over-year acceleration in nearly all its brands (with Williams-Sonoma at a record 29%, Pottery Barn at 8% and West Elm at 7%).
The company also posted per-share earnings of $1.70 (up 107%), and it maintains a strong liquidity position of $948 million in cash, including almost $216 million in operating cash flow resulting from its strong Q2 performance. (Q3 earnings aren’t due out until late November.)
Looking ahead, management sees the growing interest in cooking among millennials as a big benefit for business in the short term. What’s more, “As more people learn to cook,” says CEO Laura Alber, “it will become a lifelong skill that should drive our business over the longer term.” Many analysts also predict healthy holiday sales for Williams-Sonoma, as consumers are expected to purchase more cooking ware for the growing eat-at-home trend.
Brick-and-Mortar Retail Stock #3: Dick’s Sporting Goods (DKS)
Athletic retailer Dick’s Sporting Goods (DKS) is an example of a national retail chain that has successfully integrated digital sales with curbside pickup at its store locations during the pandemic. The firm’s e-commerce sales were exceptional in the second quarter, increasing nearly 200%, with net sales jumping to $2.7 billion (up 20%). More than 75% of Dick’s online sales were fulfilled by its stores, which serve as localized distribution points. By the end of June, the company had reopened 100% of its stores to the public.
Health and fitness equipment sales have been especially strong during the pandemic, with consumers increasingly exercising at home instead of going to gyms. Looking ahead, while the company declined to offer guidance for the rest of the year due to COVID-related uncertainties, analysts see continued top- and bottom-line growth in the next two quarters (Q3 earnings are due out November 24). And though there are some question marks pertaining to the holiday season, the stock’s performance in recent months suggests that forward-looking institutional investors expect brighter days ahead for the company.
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Clif Droke is Chief Analyst of Cabot SX Gold & Metals. For over 20 years, he has worked as a writer, analyst and editor of several market-oriented advisory services and has written several books on technical trading in the stock market, including “Channel Buster: How to Trade the Most Profitable Chart Pattern” and “The Stock Market Cycles.”Learn More
*This post has been updated from an original version.