Retailers are evolving to meet the expectations of modern, tech-savvy shoppers. This includes developing an online presence to fend off e-commerce competitors, a strategy that has helped the industry maintain steady demand by giving it more sales channels. In turn, retail stocks were up 9.4% over the past six months, on par with the S&P 500.
Nevertheless, investors should tread carefully as many companies will light cash on fire by opening new locations without the proper justifications. 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:
Lowe's (LOW)
Market Cap: $159.7 billion
Founded in North Carolina as Lowe's North Wilkesboro Hardware, the company is a home improvement retailer that sells everything from paint to tools to building materials.
Why Does LOW Worry Us?
- Products have few die-hard fans as sales have declined by 4.2% annually over the last three years
- Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
- Gross margin of 33.4% is an output of its commoditized inventory
Lowe’s stock price of $285.44 implies a valuation ratio of 21.8x forward P/E. Read our free research report to see why you should think twice about including LOW in your portfolio.
Macy's (M)
Market Cap: $5.58 billion
With a storied history that began with its 1858 founding, Macy’s (NYSE: M) is a department store chain that sells clothing, cosmetics, accessories, and home goods.
Why Do We Avoid M?
- Ongoing store closures and lackluster same-store sales indicate sluggish demand and a focus on consolidation
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
- Earnings per share have contracted by 22.4% annually over the last three years, a headwind for returns as stock prices often echo long-term EPS performance
At $21.05 per share, Macy's trades at 9.9x forward P/E. To fully understand why you should be careful with M, check out our full research report (it’s free).
One Consumer Retail Stock to Watch:
Costco (COST)
Market Cap: $431.1 billion
Designed to be a one-stop shop for the suburban consumer, Costco (NASDAQ: COST) is a membership-only retail chain that sells groceries, apparel, toys, and household items, often in bulk quantities.
Why Should COST Be on Your Watchlist?
- Brick-and-mortar locations are witnessing elevated demand as their same-store sales growth averaged 5.9% over the past two years
- Dominant market position is represented by its $280.4 billion in revenue, which compensates for its subpar gross margin
- Stellar returns on capital showcase management’s ability to surface highly profitable business ventures, and its returns are climbing as it finds even more attractive growth opportunities
Costco is trading at $974.44 per share, or 48.4x 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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