Retail sales are a closely watched economic indicator every month. For the last year, the monthly and year-over-year (YOY) numbers have been weak at best. But there’s a bigger problem. The headline number doesn’t tell the full story of what ails retail stocks.
When adjusted for inflation, the retail sales numbers are negative. But you’re a consumer as much as an investor, and you know it’s true. Consumers started to reject price increases some time ago. Now, they’re starting to shut their wallets altogether.
But help could be on the way for ailing retailers. We’re rapidly heading into the last quarter of the year, a time filled with holidays and other reasons for consumers to spend. This year, interest rate cuts could help the consumer.
While rate cuts will take a quarter or so to show up in earnings, investors will likely front-run the cuts as sector rotation is underway. That makes late summer a good time to consider buying retail stocks that may not need Black Friday for help.
Walmart (WMT)
Owning Walmart (NYSE:WMT) stock has been a good year. The company split its stock 3-for-1 on February 26. With five months left, the stock is up 30% for the year. Despite that growth, analysts are bidding WMT stock higher. On July 10, Piper Sandler initiated coverage on the retailer with an Overweight rating and a price target of $81, more than 15% above the current consensus target of $71.
In its first quarter earnings report, Walmart beat on the top and bottom lines. That’s not surprising, but it was noteworthy the company’s commentary about the impact of inflation. It’s true that low-income consumers are pulling back on discretionary spending, but the company is finding that more affluent consumers who may not normally shop at Walmart are picking up some of that slack.
And it’s not just who’s shopping at Walmart; it’s how they’re doing it. Walmart has made a significant investment in its e-commerce business, and in 2023, e-commerce sales increased 20%.
Deckers Outdoors (DECK)
Speaking of companies that are splitting their stock, Deckers Outdoors (NYSE:DECK) will execute a 6-for-1 stock split in September. On September 9, DECK stock shares will begin trading at their split-adjusted price.
Deckers Outdoors has been one of the best-performing retail stocks not just in 2024 but for the last five years. The stock delivered share price growth of 517% at that time. There’s no secret to its success. Deckers is the parent company of footwear brands such as Hoka, Uggs and Teva.
In its first-quarter earnings report on July 25, 2024, Deckers reported revenue up 22% year-over-year (YOY) and earnings up a whopping 87%. That’s impressive growth, and the company is entering what is typically the best two quarters of its fiscal year.
DECK stock has jumped 7.9% since the earnings report but was down nearly 10% before that. If you’re not invested in DECK stock yet, you may want to wait until the stock splits to take a position.
Genuine Parts (GPC)
Among retail stocks, Genuine Parts (NYSE:GPC) has been a model of consistency for value investors. The dividend king has increased its dividend for 69 consecutive years and has a yield of 2.79%. However, in the past 10 years, GPC stock has generated a total return of just over 130%.
That means there’s more to this stock than just a reliable dividend. Part of that comes from the company’s business model, which supplies office products, automotive and industrial replacement parts and electrical/electronic materials.
GPC stock was up sharply for the year through May, perhaps on expectations of a rate cut. Analysts are lowering their price targets as it became apparent that the rate cuts were being pushed further back and that the company’s YOY growth was slowing. However, in doing so, many analysts may acknowledge that at around 15x forward earnings, the stock is fairly valued, so investors shouldn’t be concerned that it will revisit its 52-week low made in November 2023.
Domino’s Pizza (DPZ)
Domino’s Pizza (NYSE:DPZ) is considered a value stock, but don’t tell that to investors who have held DPZ stock in the last five years. The stock has delivered a total return of 83.13%. And if you go further back, the gains are even higher. However, Domino’s has some work to do if it’s going to deliver that kind of return in 2024. The stock price is up just 2.4% for the year.
One way that Domino’s has been delivering growth has been by opening new stores. In the company’s first quarter earnings report in July, management announced that it wouldn’t be opening as many new stores as expected which is a key reason the stock has dropped 16% in the 30 days ending August 1, 2024. Nevertheless, less growth doesn’t mean no growth. Domino’s still has aggressive plans to open up to 1,100 stores through 2028, which is likely to increase annual sales by an average of 7%.
Chewy (CHWY)
As consumers deal with inflation not felt for the better part of 40 years, the definition of an essential purchase is changing. That’s been the challenge for many retail stocks, but not so much for Chewy (NYSE:CHWY). Despite cutting back in many ways, Americans still spend on their pets.
As that spending shows up in Chewy’s revenue and, most importantly, its earnings, investors are buying the idea that the sell-off in CHWY stock, which became a meme stock in 2021, is simply overdone.
Speaking of meme stocks, Chewy stock appears to have grabbed the attention of activist investor Keith Gill (aka Roaring Kitty). However, I would much rather focus on a company that continuously increases revenue and earnings yearly.
At 102x forward earnings, CHWY doesn’t come cheap. However, analysts are projecting a 60% growth in earnings for the company. If that’s the case, double-digit growth in the company’s share price doesn’t seem unreasonable.
e.l.f. Beauty (ELF)
Cosmetics and skin care stocks have been some of the best-performing retail stocks since 2020, even though e.l.f. Beauty (NYSE:ELF) has only been trading publicly since 2019; it’s already one of the fastest-growing companies in the sector. In fiscal year 2024, e.l.f. Beauty increased its market share by a whopping 305 basis points.
One reason for that growth is the company’s commitment to its formulas being 100% vegan, with no animals harmed in their creation. That has massive appeal to the company’s millennial and Gen-Z base, and that appeal is showing up in every area of its business.
It’s hard to find a weak spot anywhere. Nevertheless, ELF stock was down 17.9% in the 30 days ending August 1 due to the company’s cautious guidance in its most recent earnings report. That’s not what investors want to hear when a company trades at 59x forward earnings. That said, e.l.f. is due to report earnings on August 8, and analysts have been bidding the stock higher in recent days.
Lululemon (LULU)
Lululemon (NASDAQ:LULU) stock is down 51% in 2024 and is trading near its 52-week low. The company is growing, but perhaps not as fast as analysts have come to expect. Nevertheless, in a world with more competition in the athleisure category that Lululemon helped invent, the phrase “know thy customer” rings true.
Lululemon caters to an affluent customer who sees value and a certain cache in the company’s brand. That can be seen in the company’s profit margin, which is over 16% and more than double the sector average of 6.2%. That said, if I’m concerned about anything, it’s analysts’ concern that Lululemon is falling behind in innovation.
But at 17.6x earnings, the sell-off in LULU stock looks overdone. Analysts have lowered their price targets, but the consensus target of $412.39 would still give the stock a 65% upside. Institutions are leading those analysts’ targets, as institutional buying has increased in the last quarter.
On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.