Despite the overall market volatility and growing fear over a possible recession, the retail sector has remained a bright spot in the market.
Economic conditions remain favorable in the U.S., with low unemployment fueling consumer confidence and spending. However, not all retailers have managed to keep pace. The best retailers have proven to be those that can offer value to their customers and those that have managed to adapt and compete online.
Recession fears are valid, and the longer the trade war persists the greater the risk to the retail sector, which is why investors that want exposure in the sector should be extra cautious and make sure they money is at work in retailers that have managed to remain ahead of the pack with the best chance of continuing to lead the sector regardless of overall conditions.
A recession would hurt all retailers, but these retailers are in the best position to weather a potential storm.
Retailer Target (TGT) has done a great job building both its e-commerce business and in-store traffic, and the stock has reacted positively. Shares of TGT have soared in 2019, with shares up 62% year to date, and is currently trading just shy of its all-time high. Target has impressed the market with annual earnings growth of 10.9% for the last five years and looking ahead analysts expect the retailer to continue growing earnings at 9.2% per annum over the next five years. The company has topped estimates on both the top and bottom line each of the last three quarters, with the recent earnings beat at the end of August pushing the stock sharply higher to a new record high. The stock remains an attractive value, with shares trading at just 17 times earnings, and the stock has a 2.5% yield.
TJX Companies (TJX)
Off-priced retailer TJX Companies (TJX) has enjoyed big gains in 2019 as consumers continue to look for value. Economic conditions remain favorable and consumer spending is strong, but as recession fears grow off-priced retailers will become even more attractive. TJX has shown consistent earnings growth in recent years and looking ahead analysts forecast the company to continue growing profits at 8.5% per annum over the next five years. Last quarter the company posted in-line earnings and revenue pushing shares to new highs. TJX shares have appreciated 26% on the year and is just shy of its all-time set mid-July.
Ross Stores (ROST)
Ross Stores (ROST) is another discount retailer that has thrived in recent years. Strong economic conditions kept consumer confidence high, but consumers remain loyal to discount retailers they discovered in the last recession. The company has grown its earnings at an annual rate of 17% over the last five years. Looking ahead, analysts expect profit growth to slow to an annual rate of 9% over the next five years, and the stock is currently trading at 21 times future earnings. The ongoing trade war with China does pose a risk to global economies, and there is increased fear that it will lead to recession in the U.S. Growing recession fears will eventually start to impact consumer confidence, which in turn would hurt spending and make discount retailer more attractive to consumers, particularly ahead of the busy holiday shopping season. ROST stock is up 29% in 2019 and just below its all-time high, fueled by three straight top and bottom line beats, the most recent positive surprise coming in late August.
Mega-retailer Walmart (WMT) remains the king of brick-and-mortar retailer, and the company also has built its e-commerce business to become the first company to really compete with Amazon.com (AMZN) online. Walmart has spent the last several years investing in its employees and online business and the investments have boosted customer satisfaction and store traffic and last quarter the company’s online sales were up 37% year over year. Walmart is also the nation’s largest grocery chain, and its large grocery business sets it apart from the majority of brick-and-mortar retailers. Walmart has shown modest annual earnings growth of 0.5% over the last five years, but growth is accelerating, and analysts forecast profits to rise 4.6% per annum over the next five years. Walmart delivered both a top and bottom line beat last quarter, and the stock is trading at 22 times future earnings. WMT stock has risen 25% since the start of the year and hit a new all-time high in the first week of September.