Some retailers stay strong while others falter.
The retail sector has been one of the hardest-hit parts of the economy in 2020. But while the health crisis has triggered a wave of retail bankruptcies, many retail companies reported incredibly strong second-quarter earnings. D.A. Davidson analyst Michael Baker recently initiated coverage on a number of retail stocks. Baker says the pandemic is a tailwind for retailers with exposure to working, playing and learning from home. In addition, he says e-commerce is a secular growth source, and retail turnover creates opportunity for survivors to gain market share. Here are Baker’s eight best retail stock picks.
AutoZone (ticker: AZO)
AutoZone is the largest American auto parts retailer. Baker says AutoZone’s exposure to the do-it-yourself theme was once a liability, but it is now an asset in today’s climate. Baker projects 4.4% earnings-per-share growth in 2020 but expects earnings growth to return to double digits in 2021 and 2022. He also forecasts 3.9% same-store sales growth this year, nearly double the Wall Street consensus estimate of 2%. Finally, Baker says AutoZone is gaining market share with its commercial business. D.A. Davidson has a “buy” rating and $1,380 price target for AZO stock.
Best Buy Co. (BBY)
Best Buy is the market leader in consumer electronics retail. Baker says the company is highly exposed to the “stay, play, earn and learn from home” theme that should drive retail sales growth over at least the next 12 months. In the longer term, Best Buy should also benefit from a rise in remote health services, Baker says. Given its unique opportunities, Best Buy will likely experience earnings multiple expansion over time and trade at a higher valuation range than in the past, he says. D.A. Davidson has a “buy” rating and $118 price target for BBY stock.
BJ’s Wholesale Club Holdings (BJ)
BJ’s Wholesale Club is a membership-only warehouse club chain with more than 200 locations in 17 states. Baker says BJ’s customers have been stockpiling core household products in response to the pandemic. In addition, he says membership growth should boost same-store sales numbers above their historical average. Baker is projecting 12% same-store sales growth and $2.30 in EPS in 2020. BJ’s shares have already more than doubled year to date, but Baker says plenty of long-term upside remains. D.A. Davidson has a “buy” rating and $50 price target for BJ stock.
Dick’s Sporting Goods (DKS)
Dick’s Sporting Goods operates more than 800 stores. Unlike other retailers on this list that have performed relatively well in 2020, Dick’s sales and share price took a hit as most sports leagues shut down. But many sports have resumed, and Baker says Dick’s will likely soon return to a sales growth turnaround strategy that was working for the company before the health crisis. In the meantime, at-home exercise equipment sales should help support Dick’s numbers. D.A. Davidson has a “buy” rating and $57 price target for DKS stock.
Grocery Outlet Holding Corp. (GO)
Grocery Outlet is an extreme discount retailer that uses an “opportunistic sourcing” model to provide a rotating selection of roughly 5,000 items. Baker says Grocery Outlet’s unique treasure-hunt operation differentiates the company from its competitors and creates a competitive moat that helps to fend off competition. Given that the company has a limited regional footprint, Grocery Outlet has significant long-term expansion opportunities and market share upside, Baker says. Finally, the company has generated consistently above-average same-store sales growth relative to peers. D.A. Davidson has a “buy” rating and $53 price target for GO stock.
Lowe’s Cos. (LOW)
Lowe’s Cos. is one of the largest home improvement retailers in the world. Many Americans stuck at home in 2020 have taken on home improvement projects, a trend that has boosted Lowe’s. Same-store sales grew 35.1% in the second quarter. Baker says the stock is one of his top retail picks, given both a supportive macroenvironment and a company-specific turnaround plan spearheaded by CEO Marvin Ellison, who took over the position in mid-2018. D.A. Davidson has a “buy” rating and $180 price target for LOW stock.
Target Corp. (TGT)
Discount retailer Target was one of the biggest winners during the second-quarter earnings season. The stock jumped after the company reported record same-store sales growth and an 80% increase in profits compared with a year ago. Baker says Target was one of the earliest and the most aggressive adopters of the omnichannel retail model, and that investment is paying major dividends. Target now has an updated supply chain and the flexibility to adapt to changing consumer preferences. Baker is projecting 6.7% full-year same-store sales growth. D.A. Davidson has a “buy” rating and $152 price target for TGT stock.
Discount retailer Walmart is benefiting from all of the same trends as Target. Walmart reported 9.3% same-store sales growth in the second quarter and 97% online sales growth compared with a year ago. Walmart has been investing heavily in expanding delivery and in-store pickup offerings, and Baker says those initiatives have served investors well during the pandemic. In addition to being well-positioned to gain long-term market share, Walmart could outperform peers during another economic downturn or a sluggish recovery, Baker says. D.A. Davidson has a “buy” rating and $148 price target for WMT stock.
Retail stocks to buy:
— AutoZone (AZO)
— Best Buy Co. (BBY)
— BJ’s Wholesale Club Holdings (BJ)
— Dick’s Sporting Goods (DKS)
— Grocery Outlet Holding Corp. (GO)
— Lowe’s Cos. (LOW)
— Target Corp. (TGT)
— Walmart (WMT)
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