Over the next month or so, school starts up again across the United States. And for parents, that means a frenzied rush of back-to-school shopping.
As investors, how can we cash in on the excitement?
Obviously, Amazon (NASDAQ:AMZN) has done a number on many brick-and-mortar retailers. But others are figuring out ways to prosper despite the rapidly changing retail landscape.
Here are four retail stocks to buy as summer vacations wind down.
Retail Stocks to Buy: Ross Stores (ROST)
An overarching theme in the so-called retail apocalypse has been the collapse of department stores such as Sears and Bon-Ton. It has certainly been the end of an era for the traditional department-store led regional mall.
But Amazon hasn’t ended clothes shopping at brick-and-mortar locations; much of the traffic has moved to non-mall retailers.
And no group of these has done better than the off-department store clothing chains. Ross Stores (NASDAQ:ROST) is a perfect example of this category. Ross is set up in (generally) cheaper shopping center locations offering great branded products in no-frill stores at rock-bottom prices.
Though Ross is a well-oiled supply chain and laser-focused on keeping overhead down, it can thrive in the new retail landscape. Its prices are competitive – if not better – than what you find online. Ross may not have the best consumer experience, but for people hunting for a bargain, it’s the place to be.
At 21.5x earnings, ROST stock isn’t cheap, but it’s not too expensive for a firm that is still growing rapidly. Additionally, ROST stock is just now approaching its high from last fall. Once it tops that, shares should break out technically to new highs.
If you like shopping at the mall, it’s worth considering buying a mall REIT operator. Be careful in what you buy, however. Lower-end mall stocks have gotten pummeled as e-commerce has crushed many malls’ fortunes.
Analysts see the field dividing, however, with the strong malls getting stronger while weak malls fade and ultimately close or get redeveloped.
Enter Macerich (NYSE:MAC). It is one of the strongest mall operators in the U.S. Its malls generate more than $700 per square foot of retail sales – that’s 40% above the national average. If you live in a large metro area, there’s a great chance that either Macerich or Simon Property (NYSE:SPG) owns the most luxurious mall or two near you.
Why buy Macerich over the larger Simon? For one thing, Macerich’s malls average even more sales per square foot than Simon. And like its sales, its dividend yield is bigger too – MAC stock pays a juicy 8.9% dividend now, compared to a more modest 5% from Simon.
MAC stock has gotten cheap because it is relatively highly-levered. Investors fretted about whether it could maintain its dividend if a recession hit. But with the economy picking up and the Fed set to cut rates, Macerich should be fine on that front.
Meanwhile, they’ve got several development projects in the works which should boost their cash flow – and ensure the dividend’s safety – going forward. When you go to the mall, if you own MAC stock, you are, in a small way, helping pay yourself a dividend as you shop.
Bloomin’ Brands (BLMN)
While you’re out doing your back-to-school shopping, you may work up an appetite. That will lead you to my favorite sub-sector within retail: the restaurants. And thankfully, there’s a tasty bargain on offer in this sector right now. That would be Bloomin’ Brands (NASDAQ:BLMN). Bloomin’ owns Outback Steakhouse, Carrabba’s, and Bonefish Grill among its trademarks.
BLMN stock fell from $22 earlier this year to just $17 now in large part due to analyst downgrades. These downgrades were based on fears about the impact of African Swine Fever. This disease has stricken tens of millions of pigs in China and other neighboring countries, causing the price of pork to spike. In theory, Bloomin’ will have to pay more for meat, and thus its profits will drop – or so say the analysts.
In practice, however, beef – not pork – is the main product Bloomin’ sells, aside from its chain focused on fish. Sure, rising pork prices will be a minor negative, but there’s no reason for BLMN stock to be down 25% when pork likely makes up just a couple percent (if that) of Bloomin’s costs.
One of the analysts that downgraded Bloomin’ also cut their rating on Chipotle (NYSE:CMG) due to swine flu fears. Chipotle responded by saying that although it indeed sells a large amount of carnitas pork, the swine fever would have an inconsequential impact on its results. CMG stock bounced back up. Bloomin’ will follow once investors figure out that the swine scare is no big deal for the company. Who goes to Outback to order a pork chop anyway?
You may have noticed that Costco (NASDAQ:COST) has quietly been one of the top-performing retail stocks of the past decade. It’s up eight-fold, in fact, since the early 2000s.
For investors that missed Costco, there’s good news – a copycat has taken the Costco model to Central and South America. It’s called PriceSmart (NASDAQ:PSMT), and it operates in Colombia, Panama, Costa Rica, and other such countries using the same membership and low-cost retail model.
Until recently, investors took the “Costco of Latin America” label a little too seriously, and bid PriceSmart stock up to the stratosphere. It often traded above 30x earnings despite relatively slow earnings growth. A recent drop in emerging market sentiment, along with PriceSmart struggling to find good new store locations, has finally taken the stock back to a more reasonable valuation. Additionally, an earnings misssent PSMT stock down to near its 52-week lows.
While PriceSmart is now priced attractively for being a standalone operation, it has also become an intriguing takeover target. Walmart (NYSE:WMT) – the largest retailer in Mexico and Central America – might take a look. It’s a natural bolt-on given that Walmart already runs that type of store with its Sam’s Club franchise. Falabella – Chile’s dominant retailer – has been expanding northward and could use more presence in Colombia. And Exito, Colombia’s leading grocery and hypermarket player, could be another potential PriceSmart buyer.
At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.
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