Updated on March 27th, 2020 by Bob Ciura
The U.S. retail industry is in a state of change. Consumers are increasingly shopping online, favoring the convenience of delivery rather than taking a trip to a store. Many retailers are struggling to adapt, having relied too heavily on malls for traffic. Some retail bankruptcies have already occurred, and more are likely to follow as the trend toward Internet retail seems unstoppable.
Making matters even worse for brick-and-mortar retailers is the threat of the coronavirus and the related damage to the economy. Multiple large U.S. cities have been placed on lockdown, virtually eliminating foot traffic to retailers. The uncertainty regarding when the coronavirus will end, as well as the likelihood of a recession in the U.S., has caused many retail stocks to crash along with the broader stock market over the past several weeks.
With all this in mind, we created a downloadable list of retail stocks, along with important financial metrics such as price-to-earnings ratios and dividend yields.
You can download an Excel spreadsheet of all retail stocks (with metrics that matter) by clicking the link below:
But not all retailers are doomed. We still view many retail stocks favorably, although investors must be selective and focus on stocks that offer a combination of value, growth, and/or dividends. Investors must also retain a long-term focus, as the short-term will continue to be volatile for the retail industry.
This article will discuss our top 10 retail stocks in the Sure Analysis Research Database. The stocks are ranked according to several factors, including expected total returns over the next five years. Stocks were further filtered using a qualitative analysis of overall business model strength, growth in e-commerce, and profitability.
Table Of Contents
You can instantly jump to any specific stock by clicking on the links below:
- Amazon.com Inc. (AMZN)
- Costco Wholesale (COST)
- Walmart (WMT)
- Lowe’s Companies (LOW)
- Home Depot (HD)
- Target Corporation (TGT)
- CVS Health (CVS)
- Genuine Parts (GPC)
- Walgreens Boots Alliance (WBA)
- Foot Locker (FL)
Top Retail Stock #10: Amazon.com Inc. (AMZN)
No list of top retail stocks would be complete without Amazon, the e-commerce giant. After all, it is because of Amazon that so many brick-and-mortar retailers have seen their sales and market share shrink over the past several years. Consumers clearly love the convenience of Internet shopping and home delivery, a trend that shows no signs of slowing down any time soon.
Amazon has grown into a massive Internet retailer. In 2019 the company generated $280.5 billion in revenue, with approximately 57% from product sales and 43% from services (from 61% and 39% in 2018). In addition, North America accounted for roughly 61% of sales, International markets make up 27% of sales and Amazon Web Services (AWS) equaled about 12% of sales last year.
On January 30th, 2020 Amazon released Q4 and full year 2019 results. For the quarter Amazon generated $87.4 billion in revenue, above prior guidance of $80 – $86.5 billion, representing a 20.8% improvement compared to Q4 2018. This result was driven by a 13.1% increase in product sales and a 33.3% increase in service sales.
For the year Amazon generated $280.5 billion in sales, representing a 20.5% year-over-year improvement compared to the $232.9 billion posted in 2018.
Source: Investor Presentation
Operating income increased from $12.42 billion to $14.54 billion. Net income increased from $10.07 billion ($20.14 per share) to $13.98 billion ($23.01 per share).
Amazon also provided guidance for the first quarter of 2020. The company expects Net Sales of between $69.0 billion and $73.0 billion, indicating 16% to 22% growth, along with Operating Income of $3.0 billion to $4.2 billion. We expect cash-flow-per-share growth of 10% per year over the next five years.
Amazon has a very high stock valuation, and the company does not pay a dividend. With growth initiatives requiring so much cash flow, it is debatable whether Amazon will ever pay a dividend to shareholders.
Related: Will Amazon Ever Pay A Dividend?
Because of Amazon’s sky-high valuation and lack of a dividend, income investors might avoid the stock. Of course, persistent overvaluation and lack of a dividend have not prevented Amazon from generating fantastic returns to shareholders over the past decade. Amazon is one of the world’s largest companies, and now dominates online retail, making Amazon an attractive growth stock and qualifying it as one of the top retail stocks.
Top Retail Stock #9: Costco Wholesale (COST)
Costco deserves mention as a top retail stock, due to its tremendous growth over the past several years. It is also one of the retailers most likely to continue thriving, even during the coronavirus. Costco is a giant warehouse retailer that operates 785 warehouses that collectively generate in excess of $160 billion in annual sales. Warehouses are spread around the world.
Source: Investor Presentation
Costco reported fiscal second-quarter earnings on March 5th and results were better than expected on the top and bottom lines. Total revenue was up 10.5% to $38.3 billion for the quarter and 8.1% to $74.5 billion for the first half of the year. Comparable sales rose 7% in the US in the first half of the year, and 6.6% for the whole company. Excluding gasoline sales and foreign exchange, comparable sales rose 6.6% in the US and 6.5% company-wide.
Digital sales were 28% of revenue in the second quarter and 17.3% in the first half of the year. Net income for the quarter was $931 million, or $2.10 per share, up from $889 million, or $2.01 per share. For the first half of the year, net income was $1.77 billion, or $4.00 per share, up from $1.66 billion or $3.74 per share.
Costco has been an obvious winner in the coronavirus crisis as consumers fight to keep their pantries and refrigerators stocked. As a result, we’ve bumped our earnings-per-share estimate for this year to $8.75.
Sales growth will continue to make up most of its predicted growth. Its model does not allow for expanding profit margins because its retail pricing is intended to be as low as possible for consumers. We are forecasting 7.5% earnings-per-share growth annually in the coming years as gross margin gains and SG&A spending continue to roughly offset each other.
The vast majority of Costco’s operating margin dollars come from its membership fees, which continue to grow at strong rates, but are a very small fraction of total revenue. This is 100% margin revenue and fuels higher comparable sales, as well as more members and more people in the stores buying. The company does not buy back stock in any sort of meaningful quantity so that is not a source of earnings growth. Steadily higher comparable sales should be enough to keep earnings growing at our forecast rate of 7.5% annually.
Costco stock trades for a 2020 P/E ratio of 33, which is a very high valuation for a retail stock. Many of Costco’s industry peers trade for single-digit earnings multiples. Our fair value estimate for Costco is a P/E ratio of 24, meaning the stock appears significantly overvalued. Plus, Costco’s huge share price gain in the past 10 years has lowered its dividend yield to just below 1%. While Costco stock is relatively unattractive for value and income investors, it makes up for this with its impressive growth.
Top Retail Stock #8: Walmart (WMT)
Walmart earns a place on this list due to its high resistance to economic downturns. Its status as the leading U.S. discount retailer means it is arguably the most recession-resistant retailer. Walmart sailed through the Great Recession of 2008-2009, and managed to grow earnings-per-share throughout the recession. In fact, Walmart was one of only two stocks in the Dow Jones Industrial Average to see its share price increase in 2008 (the other being McDonald’s).
Walmart has an impressive dividend history. It has increased its dividend for over 40 consecutive years, placing the stock on the list of Dividend Aristocrats. You can see the entire list of all 64 Dividend Aristocrats here.
Walmart reported fourth-quarter and full-year results on February 18th, which were in line for revenue, but missed expectations on the bottom line. Total revenue was $524 billion for the year, up 1.9% from 2018. Excluding currency translation, revenue would have risen 2.7%. Comparable sales at Walmart US came to 2.8% in 2019, and on a two-year stacked basis, were up 6.4%. Walmart US ecommerce sales soared 37% in 2019, comprising nearly all of the company’s comparable sales gain.
Source: Investor Presentation
Sam’s Club continues to struggle as comparable sales were up just 0.7%, but reduced tobacco sales negatively impacted comparable sales by 310bps in 2019. International sales were up 2.8% in constant currency, with particular strength from Mexico, China, and India. Walmart generated $25.3 billion in operating cash flow in 2019 and returned $11.8 billion to shareholders through dividends and repurchases.
In total, earnings-per-share for 2019 came to $4.93, up fractionally from 2018. Walmart guided for much better earnings this year, and our initial estimate is for $5.10 for 2020.
Looking forward, we are forecasting 4.5% annual earnings growth for the next five years as Walmart continues to work through its margin issues. The company continues to buy back stock as well. We see low single-digit sales growth each year, with its e-commerce business being the primary driver of top line growth. That combination should be good enough to create mid-single-digit growth without the benefit of margin expansion.
Walmart’s competitive advantage is in its enormous size as it can buy and ship product at scales no other company can rival. This allows it to operate with low prices to consumers and as more than half of its revenue comes from groceries, its recession performance is excellent. The company managed to increase earnings steadily during and after the Great Recession. We view Walmart as arguably the safest retail stock to own in a recession.
Top Retail Stock #7: Lowe’s Companies (LOW)
Lowe’s Companies is the second-largest home improvement retailer in the U.S. (after Home Depot). As of January 31st 2020, Lowe’s operated 1,977 home improvement and hardware stores in the United States and Canada representing 208.2 million square feet of retail selling space.
In the 2019 fourth quarter, Lowe’s reported 2.5% comparable sales growth along with 17.5% adjusted earnings-per-share growth. Comparable sales were negatively impacted by a 0.5% decline in transactions, but this was more than offset by a strong 3% increase in average ticket.
Source: Investor Presentation
Lowe’s has a strong track record of growth. Between 2009 and 2018 Lowe’s grew its earnings-per-share by 17.3% a year. Of course, profits were negatively impacted by the 2008-2009 financial crisis, and as a result investors should expect Lowe’s earnings to decline if the U.S. enters a recession. But the company is also highly leveraged to economic recoveries, and would likely be one of the stronger-performing retailers coming out of a recession.
Even if the U.S. economy does enter a downturn, we would expect Lowe’s to continue paying–and even raising–its dividend each year. Lowe’s has increased its dividend for over 50 consecutive years, placing it on the exclusive list of Dividend Kings. You can see all 30 Dividend Kings here. Lowe’s has a solid dividend yield of 2.6%, which slightly exceeds the average yield of the S&P 500 Index.
Lowe’s is a Dividend King, and continued to raise its dividend even during recessions and the last financial crisis. This very strong track record, and coupled with the fact that Lowe’s dividend payout ratio is quite low, shows that Lowe’s is a very reliable and low-risk dividend stock where investors do not have to worry about a dividend cut.
Top Retail Stock #6: The Home Depot (HD)
Home Depot was founded in 1978 and since that time has grown into a juggernaut home improvement retailer with almost 2,300 stores in the U.S., Canada and Mexico that generates annual revenue above $110 billion. The stock has a market capitalization above $200 billion, making it one of the largest retailers by market capitalization.
Home Depot is in the process of a multi-year period of significant investment, which has enabled it to build on its already-impressive competitive advantages.
Source: Investor Presentation
The company reported excellent fourth-quarter and full-year 2019 financial results on February 25th. Total revenue for the fourth quarter came to $25.8 billion, which was in-line with estimates. Home Depot delivered a strong beat on the bottom line, as earnings-per-share of $2.28 came in ahead of expectations by $0.17 per share.
For 2019, Home Depot generated net sales of $110.2 billion, up 2% from 2018. Comparable sales, which measures sales at stores open at least one year, grew 3.5%, including 3.8% growth in the United States. Diluted earnings-per-share increased 5.3% to $10.25 for the full year.
If the coronavirus results in lower economic activity in the U.S. and around the world, Home Depot (along with close competitor Lowe’s) would not be immune. Indeed, home improvement retail relies on a financially-healthy consumer and positive economic growth. That said, we believe the negative effect of coronavirus would be short-term in nature. Over the long-term, Home Depot has a very bright future.
Home Depot trades at a higher valuation than many of its peers in the retail industry, but its premium is well-deserved. The company continues to register excellent growth, and will likely see one of the strongest snap-backs among the retailers when the coronavirus crisis ends.
Home Depot is also a dividend growth stock. It has increased its dividend for over 10 years in a row, and has now declared 132 consecutive quarterly dividends. Home Depot has a solid forward dividend yield of 3.1%, and recently increased its dividend by 10%. This makes Home Depot an attractive combination of dividend yield and dividend growth.
Top Retail Stock #5: Target Corporation (TGT)
Target was founded in 1902 and after a failed bid to expand into Canada, has operations solely in the U.S. market. Its business consists of about 1,850 big box stores, which offer general merchandise and food. Target generates approximately $81 billion in total revenue this year.
Target reported Q4 and full-year earnings on March 3rd and results beat expectations on the bottom line, but slightly missed revenue consensus. Comparable sales rose 1.5% in Q4, which was short of expectations of a 2.1% gain. Transactions rose 1.3% during the quarter and the average ticket moved fractionally higher, adding 0.2%.
Full-year sales were up 3.6% to $77 billion, reflecting a 3.4% comparable sales gain and a fractional gain from nonmature stores. The company continues to gain due to its digital initiatives, as that channel produced more than 80% of the company’s comparable sales gains in the fourth quarter. Target’s earnings-per-share rose from $5.39 to $6.39 year-over-year as the company’s impressive growth continues.
Target is not immune to a recession, but it should fare better than many other retailers due to its status as a nationwide discount retailer. For example, in the Great Recession, its earnings-per-share fell 14% in 2008. Nevertheless, that performance was much better than that of most companies, which saw their earnings collapse during the Great Recession. Moreover, it took only one year for the earnings of Target to return to their pre-crisis level. Therefore, while Target is vulnerable to economic downturns, it is much more resilient than most stocks in such periods.
Target has a secure dividend payout with an expected 2020 payout ratio below 40%, and an attractive yield of 3%. Target has all the qualities investors should look for in a retail stock right now. It has growth potential due to its booming e-commerce business, while retaining a defensive quality from its recession-resistant business model.
Like Walmart, Target performed extremely well during the Great Recession, and has increased its dividend for more than 40 consecutive years. But at the same time, Target has a significantly higher dividend yield than Walmart along with a stronger growth profile than its main competitor in the discount retail space.
Top Retail Stock #4: CVS Health Corporation (CVS)
CVS Health Corporation is an integrated healthcare services provider that operates a pharmaceutical services business, along with the country’s largest chain of pharmacies. The company operates more than 9,900 retail locations, 1,100 medical clinics, and services more than 102 million plan members. CVS Health Corporation generates annual revenues of about $263 billion.
In 2018, CVS Health Corporation completed its acquisition of Aetna. This was a transformational acquisition for the company, as it not only expands and diversifies its revenue, but also provides for significant cost synergies. The company expects $750 million of cost synergies in 2020.
Source: Investor Day
CVS Health Corporation released fourth quarter and full-year earnings results on 2/12/2020. The company’s adjusted earnings-per-share was $1.73 for the quarter, down 19% from the previous year primarily due to a higher share count. However, revenue increased 23% to $66.9 billion, which was $2.9 billion above consensus estimates.
For 2019, adjusted earnings-per-share was $7.08, matching results for 2018. Revenue grew 32% to $256.8 billion. Much of the revenue growth for both the quarter and year was due to the purchase of Aetna. Pharmacy Services had 6.2% revenue growth as total pharmacy claims processed improved more than 10%. Increased volumes more than offset price compression and a higher generic dispensing rate. Revenues for the Retail/LTC business improved 2.5% and prescriptions filled was higher by 5.6%, again due to higher volumes.
Retail pharmacy grew same-store sales 3.2% as pharmacy sales were up 4.9% and pharmacy prescription volumes improved 6.9%. Front-of-store sales rose 0.7% as health and beauty continue to lead in this area. Cough and cold products were especially strong during the quarter. Health Care Benefits segment, which is the equivalent to the former Aetna Health Care division, produced revenues of $17.2 billion. Medical membership increased 3.6% to 22.9 million.
CVS continues to see strength across the business, and while the coronavirus outbreak will likely erode the company’s financial results for 2020, we see this as a short-term issue. The long-term growth outlook remains highly positive for CVS. In the meantime, investors can collect a 3.5% dividend yield that appears secure.
Top Retail Stock #3: Genuine Parts Company (GPC)
Genuine Parts Company was founded in 1928 and since that time, it has grown into a sprawling conglomerate that sells automotive and industrial parts, electrical materials and general business products. The company’s flagship brand is NAPA auto parts stores.
Source: Investor Presentation
Genuine Parts reported Q4 and full-year earnings on February 19th, and results were better than expected on the top and bottom lines. Sales for 2019 came to $19.4 billion, up 3.5% from 2018’s level of $18.7 billion. The full-year period represented the third consecutive year of record sales for the company. Net income was $833 million on an adjusted basis. Adjusted earnings-per-share came to $5.69, just slightly above adjusted EPS of $5.68 in the previous year.
Genuine Parts is likely to see continued growth for many years in its core auto parts business, thanks to a major trend taking place in the United States. Consumers are keeping their cars on the road for much longer, rather than buying new cars more frequently. This is a potential gold mine for Genuine Parts, as older cars require more frequent repairs, and these repairs get more expensive as a vehicle ages.
Source: Investor Presentation
According to a recent company presentation, the average repair cost per year of a vehicle aged 1-5 years is $555. But this increases to $829 for a vehicle aged 6-12 years, and declines somewhat to an average annual repair cost of $797 for vehicles older than 12 years. As a result, the prime years for aftermarket repairs start at year 6. Since vehicles aged 6+ years constitute over 70% of the total U.S. vehicle fleet, Genuine Parts should benefit from this tailwind for years to come.
In addition to its long-term growth potential, Genuine Parts earns a place on this list because of its impressive dividend growth history. The company has increased its dividend each year for over 60 consecutive years, placing it on the exclusive list of Dividend Kings. Plus, the stock has a high yield of 4.9%, making Genuine Parts highly appealing for current income as well as dividend growth.
Top Retail Stock #2: Walgreens Boots Alliance (WBA)
Walgreens Boots Alliance is a pharmacy retailer with over 18,000 stores in 11 countries. Walgreens has increased its dividend for 44 consecutive years. Like Target and Walmart, Walgreens is on the list of Dividend Aristocrats.
The company recently concluded fiscal 2020 Q1, and the results were mixed. Walgreens reported a 6% decline in adjusted earnings-per-share for the quarter while sales increased 1.6% (up 2.3% on a constant currency basis), thanks to continued growth in the Retail Pharmacy USA segment and a 5.2% increase in the Pharmaceutical Wholesale segment.
Walgreens made progress on a number of strategic initiatives last quarter. It created a German wholesale joint venture with McKesson (MCK) and formed a group purchasing organization with Kroger (KR) as it believes these strategic partnerships will help it grow its market share and improve its long-term growth outlook.
The most recent quarter showed that the company continues to struggle with earnings-per-share growth, but also is taking steps to secure its long term growth prospects through strategic investment. It is aiming to accomplish this by accelerating its digitization, restructuring its retail business and transforming its stores into neighborhood health centers, and significantly improving cost efficiencies.
Source: Investor Presentation
Pharmacy sales were up 2.9% last quarter, while prescriptions grew 1.4%. This shows that Walgreens continues to be the go-to retailer for pharmacy products and services. Excluding acquisitions, pharmacy sales and prescriptions still grew 2.5% and 2.8%, respectively. One negative point from the quarter was that Walgreens lost market share by 55 basis points, to 20.9%. In addition, its international segment saw a 2.7% decline in sales due to ongoing soft market conditions in the U.K.
While the company continues to be plagued by sluggishness and growing competition in the space, there should be plenty of room for growth next year and beyond, thanks to sales growth, strategic initiatives, and the continued integration of the Rite Aid acquisition.
Walgreens’ competitive advantage is its leading market share. Its robust retail presence and convenient locations encourage consumers to use Walgreens instead of its competitors. This brand strength means customers keep coming back to Walgreens, providing the company with stable sales and growth.
Consumers are unlikely to cut spending on prescriptions and other healthcare products even during difficult economic times which makes Walgreens very resistant to recessions. Walgreens’ adjusted earnings-per-share declined by just 7% during 2009 and the company actually grew its adjusted earnings-per-share from 2007 through 2010.
Despite its weak fiscal year, Walgreens has a positive long-term growth outlook. Retail Pharmacy has proven to be resistant to e-commerce and will benefit from the aging U.S. population and rising demand for healthcare. The company also raised its cost-cutting target from $1.5 billion, to over $1.8 billion by fiscal 2022. Store closures are part of this plan. Walgreens already announced it will close 200 Boots stores in the U.K., and more recently announced the closure of 200 stores in the U.S.
Walgreens has a current share price of ~$45 and a midpoint for adjusted earnings-per-share of $6.00 for fiscal 2020. As a result, the stock trades for a price-to-earnings ratio of 7.5. While Walgreens could follow other retailers’ leads and reduce or withdraw its earnings forecast, this is a very low valuation for a highly-profitable company. Over the past 10 years, Walgreens held an average price-to-earnings ratio of 16.2, indicating the extreme undervaluation of Walgreens stock.
As a result, we rank Walgreens among the top retail stocks for its long history of dividend growth, strong brand, and its ability to capitalize on the growing demand for healthcare. Walgreens is also optimally positioned to survive the coronavirus, as it is a sought-after source of healthcare products and prescription medications. Walgreens is also particularly attractive to income investors, due to its high dividend yield of 4.1%.
Top Retail Stock #1: Foot Locker (FL)
Foot Locker was established in 1974 as part of the F.W. Woolworth Company, and became independent in 1988. Today, Foot Locker is a major athletic apparel retailer, operating over 3,100 stores in 27 countries. The company generates annual revenue of $8 billion, and the stock has a market capitalization of $2.4 billion.
Foot Locker reported fourth-quarter and full-year financial results in late February. For the fourth quarter, sales of $2.2 billion declined 2.2% year-over-year, as comparable sales (which measures sales at stores open at least one year) declined 1.6%. That said, adjusted earnings-per-share increased 4% for the quarter, boosted by share repurchases.
For 2019, net sales grew 0.8% to a record of $8 billion. Comparable sales increased 2.2% for the year, while adjusted earnings-per-share increased 4.7% to $4.93. The company exhibited strong inventory management, as merchandise inventories were $1.21 billion at the end of the year, down 4% in constant currencies from the 2018 fourth quarter.
Foot Locker’s competitive advantage is in its valuable brand and leading position in retail athletic apparel. Moreover, Foot Locker’s strong balance sheet affords the company financial stability and the ability to invest in growth initiatives. Foot Locker ended 2019 with cash and cash equivalents of $907 million, compared with $122 million in debt on the balance sheet. The company’s total cash position, net of debt, was $18 million higher than at the same point last year.
Such a strong financial condition is a significant competitive advantage, particularly during recessions. During the Great Recession, Foot Locker’s earnings-per-share declined by 74% at their lowest, but earnings more than doubled in 2010, and by 2011 had fully recovered and reached a new high.
The business environment remains challenged for brick-and-mortar retailers such as Foot Locker. In response, Foot Locker has invested in its own direct-to-consumer platform. As a percentage of total sales, the direct channel represented 18.7% of total sales. International markets continue to be a source of strength, with low double-digit comparable sales growth in 2019.
Still, Foot Locker’s reliance on physical stores is a negative development for the near-term. The company recently announced the closure of all its stores in its North America, EMEA and Malaysia segments through March 31st. Foot Locker also withdrew its financial guidance for 2020, adding uncertainty to the company’s near-term outlook. However, the long-term is still promising for the company, due to its strong brand, and direct channel growth.
With a 6.9% dividend yield and a low P/E, Foot Locker stock is an attractive mix of dividend yield, growth, and value. It also has a strong balance sheet and an industry-leading brand.
The brick-and-mortar retail industry is broadly struggling, as consumers are taking more of their shopping online. This trend should only accelerate in the future, meaning it is up to retailers to adapt. Many have done just that, by investing in their own e-commerce platforms and closing unprofitable stores. These are the brick-and-mortar retailers that are best-equipped to survive and continue to grow.
An added challenge to the entire retail industry–brick and mortar as well as Internet retailers–is the coronavirus outbreak. The ensuing economic damage could linger for months to come, even after the virus outbreak has subsided. A likely recession in the U.S. is a negative catalyst for the entire retail industry.
With all that said, long-term investors should focus on the highest-quality retail stocks that can survive the coronavirus crisis. The 10 retail stocks on this list have bright long-term futures, and are likely to return to growth once the coronavirus subsides. Investors should closely monitor their financial results in future quarters, to ensure their progress remains on track. But these 10 retailers should continue to generate strong profits, steady growth, and with the exception of Amazon, rising dividends.