5 adapting retail stocks to buy now

Now that you actually can have breakfast at Tiffany, and that you’ll soon be able to walk into a store and buy marijuana, you might ask yourself what surprises the retail sector has in store for you next. If your answer is a better ROI on your stocks than last year, your prayers might just be answered.

Retail_Stocks2017 was by any measure an annus horribilis for the retail industry. You’d be hard pressed to find a retailer who had an even decent year. In the US, about 7,000 stores were shuttered, led by Walgreens (600) and Kmart and Sears (300). Bankruptcies were up considerably, and included established names such as Toys ‘R’ Us and Radio Shack. In Canada, Sears Canada, Danier Leather and Gymboree all closed shop.

But if it was a wobbly year for retailing, it was an even shakier year for retailers. Most felt under siege, on the one hand responding to the significant migration of brick and mortar consumer to online shopping, and on the other, understanding that the in-store experience had to be richer, with less emphasis on shopping, and more emphasis on entertainment, hospitality and community.

The buzzword was—and remains—‘experiential’. (Given the wide media attention to shoppers’ migration to cyberspace, it is interesting to note that online purchases account for only 10 per cent of total retail sales.) But not every retailer has the savvy to personalize and curate merchandise the way shoppers want. And how many retailers can match the experience of the NFL Experience in Times Square, which allows a fan to suit up and call plays like Tom Brady.

(NOTE: While Starbucks has never been a contrarian, it’s interesting to note that it took down its online store in the fall of 2017, with Chairman Howard Schultz noting that: “Every retailer that’s going to win in this environment must become an experiential destination. Your products and services, for the most part, cannot be available online or on Amazon.”)

Despite the disruption and hand wringing, a good number of analysts have a positive outlook for many consumer goods stocks—for 2018 and beyond. While retailers must adapt to a changed industry and changing shopping habits, some see the months ahead as a period of transition, with the ability to make the transition dependent on a retailer’s resources, agility and commitment. Analysts, however, also feel that many retailers will adapt and succeed in the new environment, success that will translate into meaningful ROI on their stocks.

But before The MoneyLetter gives you a snapshot of retailers that represent a ‘Buy’ opportunity, we’d like to highlight some of the major trends re-shaping the retail industry. Being aware of those trends will help you determine if the management of a particular retailer is embracing and implementing change in a disrupted environment.

Trends re-shaping the retail industry

1. What’s in store for you? Retailers moving the dial on the in-store experience have already realized that a store has to be more than a store. For example, whether they are in a stand-alone location or a department store, Nespresso customers can inhale the atmosphere, discover the latest coffee machines and participate in a tasting session, or just relax and very slowly sip a double espresso.

2. The use of artificial intelligence is growing. Its ability to affect a buying decision positively is proven. For example, through augmented reality, a shopper can see how a suite of furniture would look in their living room. Sensors on shelves that can read shoppers’ faces and machine learning software that can optimize prices are some other applications of artificial intelligence.

3. So too is the use of analytics. Customer preferences change—either in a moment or over time. Collecting the data and culling the right insights from the data—on say, a shift in colour preferences—enables a retailer to respond and have the right product on the shelf at the right time. Any retailer worth its salt—and stock price—has just got to have data scientists on its staff.

4. Emergence of ‘direct to consumer’ (DTC). Having control over how a product is priced, merchandised and sold are extremely important to a brand’s success. While not necessarily new (e.g., Polo), more and more brands are moving out of department store and into their own stand-alone locations. This is the DTC model. For example, Canada Goose has brick and mortar locations in Toronto, New York, Chicago and Tokyo. Recently, it raised its earnings forecast based, in part, on the success of its DTC strategy.

5. Omni-channel retailing: The newest, most comprehensive model replaces multi-channel retailing and delivers a seamless shopping experience, whether customers are shopping on a desktop, mobile device, telephone or in a brick and mortar store. It is the ultimate in shopping efficiency and convenience, and the most forward—and profitable—retailers are adopting the model almost as fast you can click ‘Buy’.

Neither exhaustive nor comprehensive, the list below contains names that regularly show up on many analysts’ ‘Buy’ lists. They are listed below in no particular order.

Walmart should rebound from sell-off

Multinational retail stock Walmart Inc. (NYSE—WMT) presents a good buying opportunity, especially after its recent 10 per cent post-earnings sell-off. While e-commerce sales slowed and profit turned lower in the latest quarter, the company had its best two-year comparable sales growth in eight years. It still holds to its online sales growth of 40 per cent for the current year and plans to double the number of online grocery pick up stations to 2,000. The program has been the biggest driver of the company’s e-commerce growth in recent years. Walmart also sees 2018 EPS of $4.75 to $5.00, up from $4.42, and a dividend yield of 2.4 percent.

Alimentation Couche-Tard still growing

Now the world’s second-largest convenience store operator, Couche-Tard (TSX—ATD.B) appears to be an earnings growth story that still has lots—and lots—of room to grow.

Once it unlocks the full synergy potential from its recent CST Brands and Holiday acquisitions, there’s little question that management will pull the trigger on more deals, while keeping its debt under control. With the company’s reputation for integrating acquisitions successfully, and those acquisitions’ history of producing significant value over the long term, the shares could well be the cheapest they’ve been in years—and a ‘Buy’.

Kohl’s stand-alone preference paying off

US department store retail chain Kohl’s Corporation (NYSE—KSS) is known for its near-flawless execution, a reputation it recently enhanced by reporting comparable-sales growth of 6.3 per cent, while reducing inventory by 7 per cent. Kohl’s prefers stand-alone locations, and the strategy has enabled it to buck declining mall traffic. In fact, in-store traffic has increased, a rare feat for a retailer these days. It’s making smart moves like devoting excess store space to partner businesses and testing a shop-in-store partnership with Amazon. It sees EPS improving to $3.95-$5.45 this year, and at the top end of that range, the stock trades at a P/E ratio of just 12.

Dollarama has not reached saturation point

Investors and observers have been waiting for dollar-store retailer Dollarama (TSX—DOL) to stumble for some time. But with each earnings release, it looks less and less likely. Fourth quarter results released in April saw diluted net earnings surge 17 per cent during the quarter and sales increase by almost 10 per cent over the same period last year. Comparable-store sales also increased by a healthy 5.5 per cent over and above the 5.8 per cent increase last year.

Store growth has always been an important goal for Dollarama and in the most recent quarter the company opened 25 net new stores—one fewer than in the same period last year. Dollarama has proven that the saturation point raised by many critics is far off, if it will be reached at all. Despite the fact that several dollar-store competitors plan to expand into the Canadian market, Dollarama’s stock prospects look very favourable.

Canada Goose flying south—and east, and west

Come late November, it’s hard not to see a parka without consumer goods stock Canada Goose’s (TSX—GOOS; NYSE—GOOS) logo on the sleeve. It’s not only ubiquitous but also a status symbol for all demographic groups, from toddlers to seniors. Despite what seems to be the overnight emergence of an upstart brand, the Canada Goose story is actually 60 years old. It’s only in the last ten years or so, that savvy marketing and merchandising has made the company’s parka a virtual sign of belonging. To drop that overused word, the brand has become ‘iconic’.

The $400 million company, which has 6 stand-alone stores and whose products are sold in 87 countries, either in stores or online, has just taken a big step to becoming a one billion dollar concern by announcing that it will open two stores and launch an e-commerce site in China. Canada Goose has sold its products through retailers in China for five years; it has already implemented the direct-to-consumer model in 5 other countries.

According to one analyst, Canada Goose has already sold out its products in China; the analyst believes that the market there could ultimately be as large as the one in the United States. That goal seems eminently attainable, given the literally pent-up demand for its products, and the fact that the company has formed alliances with internet giant Alibaba and Imagine X, a division of high-end fashion retailer Lane Crawford Joyce Group. Imagine X will run and staff the Canada Goose-owned stores in China.

Another reason followers like it is that the company recently announced that it will move an additional 30 per cent of manufacturing in-house from off shore. About 60 per cent of manufacturing is now done in Canada Goose factories. Like the direct-to-consumer sales channel, the move further increases the company’s ability to control its brand and the quality of its products.

While Canada Goose’s stock has more than doubled since last year, and prospects for increased sales appear excellent, it should be noted that the stock trades at more than 35 times book value and over 10 times sales. The stock is very expensive, which is why several analysts suggest waiting till it has come back to earth to invest new money. However, most analysts love the stock and predict that it will appreciate significantly in the immediate few years.

Stephen Bernhut is a Toronto investment writer.

This is an edited version of an article that was originally published for subscribers in the June 2018/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

The MoneyLetter, MPL Communications Inc.
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