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2 Retail Stocks to Buy in January, 2 to Avoid

Given the strong possibility of economic recovery in 2021, investors could bet on the recovery of the retail sector which was profoundly impacted by the pandemic. However, not all retail companies are well positioned for a recovery yet. High growth rates of Ross Stores, Inc. (ROST) and Burlington Stores, Inc. (BURL) make them solid picks now, but it’s wise to avoid weaker players like Macy's Inc (M) and J. Jill, Inc. (JILL) at the moment.

Retail companies, particularly the traditional brick-and-mortar retailers, have been devastated in 2020 thanks to the pandemic. Government orders to shutdown physical stores, and quick adoption of online shopping by customers were the key reasons why the retail space was profoundly impacted. However, the phased reopening of the economy and strategic changes in the business models have been helping some retailers recover. The deployment of effective vaccines is also boosting investors’ confidence in the retail space.

Retail stocks, as represented by the SPDR S&P Retail ETF (XRT), have significantly outperformed the broader market. XRT has gained 40% this year versus the S&P 500’s 15.6% returns. The momentum is likely to continue as the economy recovers steadily next year and consumer spending reaches pre-pandemic levels.

The retail landscape has rapidly undergone a change, primarily due to supply chains disruptions and permanent store closures. However, several long-term winners and losers have emerged based on fundamentals and recent developments. While Ross Stores, Inc. (ROST) and Burlington Stores, Inc. (BURL) have fared well and could generate promising returns next year, the prospects appear bleak for stocks like Macy's Inc (M) and J. Jill, Inc. (JILL).

Stocks to Buy:

Ross Stores, Inc. (ROST)

ROST operates off-price retail apparel and home fashion stores under the Ross Dress for Less and dd's DISCOUNTS brands, offering apparel, accessories, footwear, and home fashions. As of October 2020, it operated approximately 1,800 off-price apparel and home fashion stores in 40 states in the United States.

In October, ROST opened 9 dd's Discounts and 30 Ross stores across 17 different states, as a part of its expansion plan. These new locations completed the company's store growth plans for fiscal 2020 with the addition of 66 new stores. Moreover, the company announced the closing of $1 billion notes offering and early settlement of tender offers in the same month.

In the third quarter that ended September 2020, ROST reported improved trends in third-quarter, delivering better-than-expected results. The company’s sales declined 2% to $3.8 billion, while comparable store sales declined 3% year-over-year. However, this implied a 40% sequential increase in revenues on the back of better merchandise assortments, a delayed back-to-school season, gains from larger markets, and a return to normal store hours. Moreover, adjusted EPS came in at $1.02, relatively stable compared to the year-ago value of $1.03 per share.

ROST’s core business results improved during the last reported quarter, demonstrating consumers continued focus on value, and its ongoing ability to deliver the bargains to its customers. Furthermore, the management still sees plenty of room to grow in the company's mature markets, while continuing to penetrate new markets. Analysts expect ROST’s revenue to rise 84.2% in the next quarter and its EPS to grow at a rate of 4.3% per annum in the next five years.

ROST closed yesterday’s trading session at $122.49, gaining 5.2% year-to-date. The stock is up 31.3% in the past three months and is currently trading at just 1.3% below its all-time high of $124.16.

How does ROST stack up for the POWR Ratings?

A for Trade Grade

A for Buy & Hold Grade

A for Peer Grade

B for Industry Rank

A for Overall POWR Rating.

It is ranked #3 of 66 stocks in the Fashion & Luxury industry.

Burlington Stores, Inc. (BURL)

BURL operates a national chain of off-price retail stores that offers fashion-focused merchandise, including women's ready-to-wear apparel, accessories, footwear and related products. As of September 2020, the company operated more than 769 stores in 45 states and Puerto Rico, primarily under the name Burlington Stores.

In the third quarter that ended September 2020, BURL’s revenue declined 6% to $1.67 billion, and comparable store sales declined 11% year-over-year. However, trends improved significantly due to its Burlington 2.0 Off-Price Full Potential Strategy, as the company chased the sales trends, took advantage of great opportunistic buys, and turned over its inventories rapidly. However, adjusted EPS came in at $0.29, compared to the year-ago value of $1.53 per share.

In the last quarter, the company introduced net 30 stores, bringing the overall count to 769. For fiscal 2020, the company still anticipates opening 62 stores, while relocating or shutting 28 stores. Moreover, the company is implementing a conservative inventory plan on account of volatile consumer demand. In line with the outlook, analysts expect BURL’s revenue to rise 67% in the next quarter and its EPS to grow at a rate of 5.5% per annum in the next five years.

With a year-to-date gain of 14.1%, BURL closed yesterday’s trading session at $260.24, after hitting its 52-week high of $264.48. Moreover, the stock has gained 19% in the past month.

It’s no surprise that BURL is rated a “Strong Buy” in our POWR Ratings system. It also has an “A” for Trade Grade, Buy & Hold Grade, and Peer Grade, and a “B” in Industry Rank. It is ranked #4 of 66 Fashion & Luxury stocks.

Stocks to Avoid:

Macy's Inc (M)

M is one of the nation’s premier omni-channel fashion retailers. The company comprises three retail brands, Macy’s, Bloomingdale’s, and Bluemercury. It sells a range of merchandise, including apparel and accessories, home furnishings, and other consumer goods. As of October, 2020, the company operated 764 store locations in 43 states, the District of Columbia, Puerto Rico, and Guam.

In the third quarter, revenue from M stores plunged from $5.2 billion last year. Comparable store sales dropped over 20%. However, digital sales grew 27% year-over-year, while digital sales penetrated at 38% of total owned comparable sales on back of curbside facility, store pickup, and same-day delivery. However, the company reported an adjusted loss of $0.19 per share, widening the year-ago loss of $0.07 per share.

M is facing a lot of competition from traditional brick-and-mortar stores and losing market share to off-price retailers like ROST and BURL. The company is planning to launch digital initiatives and anticipate closing 125 stores in the next couple of years in an attempt to save fixed costs. However, online retail giants like Amazon.com (AMZN) are contending for the same customers through apparel offerings. Analysts expect M’s revenue to rise 39.5% in the next quarter, but its EPS to decline at a rate of 11.8% per annum in the next five years.

M is down 29.2% year-to-date to close yesterday’s trading session at $12.03. Though the stock is up 17.8% in the past month, it is still trading at a 35% discount from it's all-time high of $18.57.

M’s POWR Ratings are consistent with this bleak outlook. It has been accorded a “D” for Peer Grade, and a “C” for Trade Grade and Buy & Hold Grade. It is ranked #36 out of 66 Fashion & Luxury stocks.

Jill, Inc. (JILL)

JILL is a premier omnichannel retailer and nationally recognized women’s apparel brand. The company offers knit and woven dresses and other outwear through retail stores, its website, and catalogs. As of September 2020, the company operates about 276 stores nationwide and has a robust e-commerce platform.

In the third quarter that ended September 2020, JILL generated $117.2 million in revenues, declining 29.4% year-over-year. Direct sales were up 4% for the quarter and penetration remained healthy at over 60% of total sales. However, the Company ended the quarter with $9.2 million in cash and $37.3 million of total availability under its revolving credit agreement. Moreover, JILL reported a loss of $2.52 per share, compared to the year-ago EPS of $0.27.

The troubled company was on the verge of bankruptcy in September, but dodged the same after dealing with its lenders base through a series of forbearance agreements, and multiple deadline extensions. Moreover, JILL approved a 1-for-5 reverse stock split in November. Additionally, a recent report by Forbes highlighted that write-downs by JILL in 2020 has created a huge “kitchen-sink effect” as the company managed its earnings using accounting tricks. Analysts expect JILL’s revenue and EPS to decline 15% and 100%, respectively, in the next quarter.

JILL is down 34.3% year-to-date and closed yesterday’s trading session at $3.71. Moreover, the stock has lost 7.5% in the past month and is presently trading 52.4% below its 52-week high of $7.80.

JILL’s poor prospects are also apparent in its POWR Ratings which gives it a “Sell” rating. It also has an “F” for Buy & Hold Grade, and a “D” for Trade Grade and Peer Grade. It is ranked #55 out of 66 stocks in the same industry.

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ROST shares were trading at $122.60 per share on Thursday afternoon, up $0.11 (+0.09%). Year-to-date, ROST has gained 5.63%, versus a 17.69% rise in the benchmark S&P 500 index during the same period.



About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies.

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