Retail stocks refer to individual shares of companies that sell retail goods. It's easy to think up a laundry list of department stores or big box stores — Dillard's, Best Buy, Costco — the list is endless. (Just consider all of the places where you shop.)
However, when on the hunt for retail stocks, it's easy to get caught up in a decision to purchase a retail stock just because you enjoy shopping there or know that "a lot of people" shop there. As any experienced investor will tell you, there's more to it than simply choosing a brand you admire.
In this article, we'll take a look at retail stocks during inflationary times, why a particular retail stock may make a good investment, when they do well, the stock performance of some top retail stocks, how to invest in retail stocks and retail stock ETFs and index funds you may want to consider adding to your list.
Let's dive in.
Retail Stocks and Inflation
The all items index increased 8.5% at the end of July, according to the Bureau of Labor Statistics. The all items less food and energy index rose 5.9% over the past year, the energy index increased 32.9% and the food index increased 10.9% over the past year, the largest 12-month increase since May of 1979.
You may have heard that during inflationary times, oil and energy stocks are some of the best stocks you can invest in because the demand for oil and gas remains high no matter what the economy is doing. However, certain retailers have combated unique supply chain issue challenges and pressure to drive prices higher by taking action, such as building more stores in new locations and/or boosting sales at current stores, reflect consumer purchase behavior, effectively address supply chain issues, address pricing and focus on value to consumers, develop brand, enhance operation productivity and more.
Sifting through the right retail stocks and best online retail stocks might yield certain companies that have advantages over competitors, but it's important to review which companies have the strongest responses during inflationary periods.
Are Retail Stocks a Good Investment?
The pandemic changed the landscape of retail investment, whether you invested in the best retail stocks, grocery store stocks, home improvement stocks or e-commerce stocks. It benefited some retailers and left others completely in shreds. E-commerce became even more prevalent once people stopped going to stores and spent money on home improvement and video games instead of earmarking money for travel or social activities.
Retailers, including specialty retailers, have also faced excess inventory due to rising inflation, mostly due to cutbacks by consumers. The aftereffects of the pandemic paved the way for online suppliers and unfortunately, for many retailers, they no longer hold customers in the palm of their hand like they did, say, in the 1990s. Retailers who can differentiate themselves often end up thriving the most.
However, it's possible to find good retail stocks by identifying key metrics that show proof strength. We'll go over key indicators of strength in the next section.
When Do Retail Stocks Do Well?
Identifying the right retail stocks can seem like tangling with the Bermuda Triangle during challenging economic times. However, it's a good idea to consider food retailers in times of economic stress — and just about any other time as well. The logic makes sense: People still have to eat, and during stressful economic periods, consumers tend to stay home and bake, saute and grill their own meals.
Therefore, grocery retailers like the following:
- Walmart
- Amazon
- Costco Wholesale
- Kroger
- Walgreens Boots Alliance
- Target
- CVS Health
- Albertsons
- Publix
However, you can take a look at sales growth, earnings growth, performance during specific times of the year, physical stores, e-commerce strength and balance sheet strength. Let's take a look at each of these important factors.
- Sales growth: How well has a company you're looking at generated revenue? How has it been calibrated from year to year? Check into a company's competitors as well as the sales growth between both companies before you buy stock in either.
- Earnings growth: How much can companies compel loyal consumers to keep coming back, even when prices nip higher? For example, some of the best retail brands with a brand following include Apple, IKEA, Walmart, Nike, Sephora, Starbucks, Lululemon, etc. (You can probably add to your own list. What brands will you support, no matter what?) Top retail companies can show proof of earnings growth and can support that growth by raising their prices. However, you can use several metrics to measure earnings growth. For example, consider using the price/earnings to growth ratio (PEG ratio) — a stock's price/earnings ratio (P/E ratio) divided by its percentage growth rate, which shows a stock's price relative to its earnings performance.
- Performance over specific quarters: Many retailers hit specific metrics during certain points of the year, such as during the holiday season, the back-to-school period or in the spring, summer or fall. Performance during key times of the year, particularly among competitors, can affect how specific key performance indicators stack up during these seasonal periods.
- Physical stores: How large is the store network and how well does the company work to maintain these physical locations? A company's holdings can determine its overall value, but it's worth noting how well the company maintains its physical locations in terms of sales strength.
- E-commerce: There's no doubt that brick-and-mortar locations still have their place, but e-commerce in many ways has taken the place of brick-and-mortar locations. Has a store restructured its physical space or made the in-store shopping experience more convenient? When so many competitors offer amenities like in-store pickup and local delivery, the absence of a strong online presence can foreshadow a withering brand.
- Balance sheet strength: Arguably one of the most important factors to evaluate is balance sheet strength by checking into a company's working capital, debt versus equity and other factors. The ultimate goal is to determine the solvency, liquidity and complete financial profile of a company.
Ultimately, making a blanket statement that "all retail stocks do well" or "all retail stocks do poorly" during particular times of the year or during specific economic cycles is impossible because it depends on the specific company you're evaluating. However, certain types of retail companies may do better than others based on a wide variety of factors.
Retail sales increased 8.4% over the past year, a total of 18% above pre-pandemic figures, according to Reuters. These figures beat economist expectations, who said retail sales would increase only 0.8%.
For example, the following increases occurred:
- Auto dealerships: 0.8%.
- Sales at service stations: 3.6%.
- Bars and restaurants: 1%
- Online store sales: 2.2%
Furniture and electronics and appliance retailers, sporting goods, hobby, musical instrument, and book stores increased but clothing retailers sales, as well as those at building material, garden equipment, and supplies stores, fell.
Top Retail Stocks List
Let's take a look at three top retail stock examples prior to choosing the right investments for your portfolio.
An obvious choice, Amazon.com Inc. (NASDAQ: AMZN), retails consumer products and subscriptions all over the world. The company sells merchandise and content purchased for resale from third-party sellers and sells electronic devices, offers Kindle Direct Publishing and develops and produces media content, allowing others to publish and sell content. The company also offers analytics, machine learning, fulfillment, advertising, publishing and digital content subscriptions. Its membership feature also allows movie streaming and other services.
The Home Depot Inc. (NYSE: HD)
The Home Depot Inc. (NYSE: HD), a home improvement retailer, sells the following:
- Building materials
- Home improvement products
- Lawn and garden products
- Décor products
- Facilities maintenance, repair and operations products
- Installation services
- Tool and equipment rental services
It maintains homedepot.com, blinds.com and thecompanystore.com, an online site for textiles and décor products.
lululemon athletica Inc. (NASDAQ: LULU)
Lululemon, stylized lululemon athletica inc. (NASDAQ: LULU), retails athletic apparel and accessories for women and men, such as shorts and leggings, tops and jackets, and other fitness-related accessories and footwear.
The company maintains and operates the following:
- Outlets
- Warehouses
- Interactive workout platforms
- Yoga studios
- Health clubs
- Fitness centers
How to Invest in Retail Stocks
Let's take a comprehensive look at how you may want to approach investing in retail stocks.
Step 1: Evaluate companies.
Analyzing key metrics can help you decide whether to invest in a particular stock and can also help you identify any red flags you may run into as you choose your investments. You may want to take a look at dividend yield, the dividend payout ratio, earnings per share and price-to-earnings ratio, for example. Let's take a look at each:
- Dividend yield: If the company pays dividends, the dividend yield lets you know the percentage of a share price a company kicks back to investors in the form of dividends. You can find the dividend share price by taking dividends per share divided by the current share price. In other words, let's say a company offers $2 in dividends per year and the stock costs $60 per share. In this case, the dividend yield is 3%. Higher-yield dividends can be risky, so watch for dividends that seem to offer a much higher dividend yield than competitors.
- Dividend payout ratio: The dividend payout ratio refers to the percentage of a company's earnings paid out as dividends. The lower the payout ratio, the more sustainable the dividend will be. If a company offers a dividend, you'll want to make sure that you'll keep raking in dividend profits for the long term instead of suffering a dry spell after a year or two. For example, let's say a company earns $1 million and issues $50,000 in dividends. In this case the payout ratio would be $50,000 / $1 million = 5%.
- Earnings per share (EPS): EPS shows how many outstanding shares of stock a company has by taking the company's quarterly or annual net income and dividing by the number of outstanding shares of stock it owns.
- Price-to-earnings (P/E) ratio: The price-to-earnings (P/E) ratio helps show you whether a company is fairly valued. You can divide a company's share price by its earnings per share to find its P/E ratio.
There are other metrics you can use to determine whether a particular stock makes sense for your particular investment needs. Make sure you determine ahead of time the type of company that makes sense for your risk tolerance and future goals.
Step 2: Open a brokerage account.
Do you have a brokerage account? If you don't already have a brokerage account, choose the right type of brokerage for you and fund your account. Consider choosing a robo-advisor, an AI-operated brokerage that eliminates the need for human interaction. You may also consider choosing a full-service stockbroker or a financial advisor who can meet with you in person and will help you choose your investments. You can also buy stock directly from the company in some cases. Take a look at the fees involved, the platform that the robo-advisor uses (if you choose to go that route) and other things that you believe you need in order to successfully invest.
Step 3: Buy your shares and reinvest.
Once you take a few minutes to set up your brokerage account, choose the number of shares you want to purchase and buy. Again, make sure that you choose the right investments that meet your goals and timeline for investment. Also consider diversifying, which means that you spread around the type and number of investments you purchase. Consider reinvesting on a regular basis, such as on a monthly basis, in order to maximize your investment potential.
Retail Stock ETFs
If you're looking for automatic diversification, you may want to consider an exchange-traded fund (ETF). An ETF works like a mutual fund (a pooled investment) but can be traded at any point during the trading day, like a stock. Take a look at the following retail stock ETFs:
- Amplify Online Retail ETF (NYSEARCA: IBUY): The Amplify Online Retail ETF contains a wide variety of retail holdings, including the Booking Holdings Inc. Shutterstock Inc. CarParts.com Inc. BigCommerce Holdings Inc. The company contains a mix of retail and e-commerce stores and has a wide variety of diversification to boot, including big players and smaller caps as well.
- SPDR S&P Retail ETF (NYSEARCA: XRT): The SPDR S&P Retail ETF contains a wide variety of retail stores, including the well-known Carvana Co., Rite Aid Corporation, Chewy Inc., Etsy Inc., Dick's Sporting Goods Inc. and Wayfair Inc. and somewhat lesser-known companies like National Vision Holdings Inc. and EVgo Inc.
