Some of the highest-profile retail stocks reported first-quarter earnings last week. The results weren’t pretty—nearly all of them fell short of either top- or bottom-line estimates. And investors wasted no time punishing the offending companies.
The list of retail stocks that plummeted on earnings last week reads like a who’s who of the retail sector:
Macy’s (M): -16.3%
Nordstrom (JWN): -13%
J.C. Penney (JCP): -11%
Kohl’s (KSS): -7.8%
Sears (SHLD): -4.6%
Target (TGT): -2.7%
Five of those large-cap retailers have failed to grow sales in at least three quarters, with Nordstrom the only exception. Macy’s hasn’t done so since 2014, Target and Kohl’s since 2015. And Sears hasn’t grown annual sales in more than a decade, so this was nothing new for them.
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It’s no coincidence. Thanks to Amazon.com (AMZN), eBay (EBAY) and other online behemoths, the days of the big retail chains are numbered. Department stores in particular have been dying a slow death for years, as evidenced by the extended sales declines at Macy’s and Sears. Their stocks have been dying as well.
In July 2015, Macy’s stock peaked at 72. It’s now down to 23.
TGT stock also peaked in July 2015, at 84. It now trades at 55.
In March 2015, Nordstrom peaked at 82. It’s now down to 56.
Kohl’s also peaked in March 2015, at 79. It now trades at 36.
Sears and J.C. Penney? Both peaked more than a decade ago—SHLD at 162, JCP at 82. They now trade at 9 and 4, respectively. I think we can officially declare those retails stocks dead.
Frankly, I wouldn’t touch any of those retail stocks. But that doesn’t mean all non-online retailers are dead. Discount retailers like Dollar Tree Stores (DLTR), Dollar General (DG), Five Below (FIVE) (where every item is $5 or less) and Costco (COST) have continued to grow sales without interruption. Dollar Tree’s growth has been especially impressive: 33% sales growth, 200% earnings growth in 2016.
Not surprisingly, shares of each of those discount retailers are trending upward, led by FIVE at +28% year to date.
So in your search for great growth stocks, you shouldn’t discount (no pun intended) the retail sector as a whole. Retailers aren’t dead. Mid-priced, department-store retailers are. There’s still a way to get consumers to leave their couches and drive to the store to buy household items, beauty products, toys, food and accessories—at deep discounts. And really, the cheaper the better.
AMZN, EBAY and Alibaba (BABA) are the more obvious retail plays in today’s web-centric consumer environment. But in stock investing, it pays not to take the obvious route. Discount retail stocks draw far less fanfare, and thus may have more potential buyers. While many of their larger, better-known brethren are either dead or on steady decline, low-priced retailers appear to have a long life ahead.
Investment analyst and Chief Analyst of Cabot Wealth Daily, Chris Preston brings you all the latest from the investing world. Sign up to get updates and breaking news delivered FREE to your inbox. Get unlimited access to our library of complimentary investing reports.Sign up now!