4 Stocks Worth a Look From a Prospering Retail-Miscellaneous Industry - January 4, 2022

The Zacks Retail – Miscellaneous industry participants have been focusing on superior product strategy, advancement of omni-channel capabilities and prudent capital investments to strike the right chord with consumers. Tractor Supply Company (TSCO Free Report) , Ulta Beauty, Inc. (ULTA Free Report) , DICK’S Sporting Goods, Inc. (DKS Free Report) and Build-A-Bear Workshop, Inc. (BBW Free Report) look well poised, courtesy of their business operating model, growth prospects and cost structure.

However, supply-chain challenges, rising freight charges and the emergence of the Omicron variant remain concerns. Also, players in the industry have been witnessing high costs associated with operations amid the coronavirus crisis.

About the Industry

The Zacks Retail – Miscellaneous industry covers retailers of sporting goods, office supplies, and specialty products as well as sellers of a wide range of domestic merchandise. It also includes retailers of beauty products providing cosmetics, fragrances, skincare and haircare products, and salon styling tools. Some of the industry participants operate rural lifestyle retail stores, arts and crafts specialty outlets, and sell their products to farmers, ranchers, and others as well as tradesmen and small businesses. The industry also comprises recreational boat and yacht retailers as well as specialty value retailers offering a broad range of trend-right, high-quality merchandise targeted at the tween and teen customer. The players’ profitability depends on a prudent pricing model, well-organized supply chain, and effective merchandising strategy.

4 Trends Shaping the Retail – Miscellaneous Industry’s Future

Consumers’ Willingness to Spend: The industry’s prospects are correlated with the purchasing power of consumers. Consumer spending activity, one of the pivotal factors driving the economy, has been strong. Rebounding economy, improving job prospects and consumers’ increasing appetite for shopping have been contributing factors. Evidently, Americans look way more confident now. Per the Conference Board, the Consumer Confidence Index jumped to 115.8 in December from November’s revised reading of 111.9. Also, industry participants have been focusing on deepening engagements with consumers and enhancing digital and data analytics capabilities.

Focus on Boosting Portfolio & Market Reach: Most companies in the space are working on providing a wide assortment of products, enhancing the online experience and adopting a favorable pricing strategy to boost sales. Initiatives such as building omni-channel operations, coming up with reward programs, and developing innovative products and services are worth mentioning. There has been an increase in demand for office supplies, personal care items, domestic merchandise products and fitness-related products. Companies are looking to fuel sales via targeted marketing.

Digitization Key to Growth: With the change in consumer shopping patterns and behavior, industry participants have been playing dual in-store and online roles. In this respect, the industry players have been directing resources toward digital platforms, accelerating fleet optimization and augmenting the supply chain. In fact, companies’ initiatives to expand delivery options — curbside pickup or ship-to-home orders — and contactless payment solutions have been a boon amid the pandemic. Additionally, retailers are investing in renovation, improved checkouts and mobile point-of-sale capabilities to keep stores relevant. Keeping in mind consumers’ product preferences and growing inclination toward online shopping, retailers are replenishing shelves with in-demand merchandise and ramping up investments in digitization.

Focus on Margins: Companies in the industry are vying for a bigger share on attributes such as price, products and speed to market. They have been accelerating investments to strengthen the digital ecosystem and boost shipping and delivery capabilities. While these endeavors drive sales, they entail high costs. Apart from these, any deleverage in SG&A rate, higher labor and occupancy costs, and increased marketing and other store-related expenses might build pressure on margins. Meanwhile, the impact of additional employee payments and benefits along with investments undertaken to preserve the safety and health of customers and team members amid the coronavirus crisis cannot be ruled out. The continued rise in such costs is likely to keep building pressure on the company’s margins. Meanwhile, the industry is currently dealing with supply-chain bottlenecks, rising freight charges and labor shortages.

Zacks Industry Rank Indicates Solid Prospects

The Zacks Retail – Miscellaneous industry is housed within the broader Zacks Retail – Wholesale sector. The industry currently carries a Zacks Industry Rank #104, which places it in the top 41% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates encouraging near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Vs Broader Market

The Zacks Retail – Miscellaneous industry has outperformed the broader Retail – Wholesale sector but underperformed the Zacks S&P 500 composite over the past year.

The industry has declined 3.2% over this period compared with the S&P 500’s rise of 30.4%. Meanwhile, the broader sector has fallen 8.7% in the said time frame.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing retail stocks, the industry is currently trading at 21.39X compared with the S&P 500’s 23.81X and the sector’s 30.23X.

Over the last five years, the industry has traded as high as 24.96X, as low as 11.28X and at the median of 16.30X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

4 Retail – Miscellaneous Stocks to Keep a Close Eye On

Build-A-Bear Workshop: Enhanced marketing programs and omnichannel capabilities coupled with pent-up demand have been contributing to Build-A-Bear Workshop’s upbeat performance. This multi-channel retailer of plush animals and related products envisions fiscal 2021 total revenues in the range of $390-$400 million.

Impressively, Build-A-Bear Workshop has a trailing four-quarter earnings surprise of 261.4%, on average. The Zacks Consensus Estimate for its current-fiscal earnings per share (EPS) has risen 26.7% in the past 60 days. We also note that shares of this Zacks Rank #1 (Strong Buy) company have zoomed 358.5% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: BBW

Ulta Beauty: The company has been strengthening its omni-channel business and exploring the potential of both physical and digital facets. It has been undertaking various tools to enhance guests’ experience, like offering a virtual try-on tool and in-store education, and reimagining fixtures, among others. The company focuses on offering customers a curated and exclusive range of beauty products through innovation. Ulta Beauty expects net sales between $8.5 billion and $8.6 billion and comparable sales growth in the band of 36-37% for fiscal 2021.

Impressively, this beauty retailer and the premier beauty destination for cosmetics, fragrance, skincare products, hair care products and salon services has a trailing four-quarter earnings surprise of 76%, on average. We note that Ulta Beauty has an estimated long-term earnings growth rate of 16.5%. Also, the Zacks Consensus Estimate for its current-fiscal EPS has moved up 0.6% in the past 30 days. Shares of this Zacks Rank #1 company have risen 47.4% in the past year.

Price and Consensus: ULTA

Tractor Supply Company: The company seems well poised for growth, thanks to its robust business strategies. The company’s “Life Out Here” and “ONETractor” strategies are worth a mention. Moreover, its omni-channel initiatives, including curbside pickup and same-day delivery, bode well. Strength in everyday merchandise, including consumable, usable and edible products as well as robust demand for summer seasonal categories, have been fueling comparable store sales. Tractor Supply’s third-quarter 2021 marked the sixth straight double-digit comparable store sales growth.

This largest rural lifestyle retailer in the United States has a trailing four-quarter earnings surprise of 22.8%, on average. Tractor Supply has an estimated long-term earnings growth rate of 10.2%. Shares of this Zacks Rank #3 (Hold) company have risen 67.5% in the past year.

Price and Consensus: TSCO

DICK’S Sporting Goods: Favorable customer demand, a solid product portfolio and strength in the online platform have been contributing to the DICK’S Sporting Goods’ upbeat performance. The company remains optimistic about the demand trends in athletic apparel, footwear, team sports and golf. The company anticipates net sales between $12,120 million and $12,190 million and consolidated same-store sales growth in the band of 24-25% for fiscal 2021.

Impressively, shares of this sporting goods retailer have gained approximately 94.6% in the past year. The Zacks Consensus Estimate for the company’s current-fiscal EPS has moved up 1.3% in the past 30 days. This Zacks Rank #3 company has a trailing four-quarter earnings surprise of 104.2%, on average, and an estimated long-term earnings growth rate of 12.8%.

Price and Consensus: DKS

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