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Miscellaneous Retail Industry's Road Map to Growth Seems Bleak

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The Zacks Retail – Miscellaneous industry covers retailers of sporting goods, office supplies, and specialty products, distributors of beauty products, and sellers of a wide range of domestic merchandise. Some of the industry participants operate rural lifestyle retail stores, arts and crafts specialty outlets, and even provide used car auctions and salvage auction services. Some of the prominent names in the industry are Bed Bath & Beyond Inc. (BBBY - Free Report) , Build-A-Bear Workshop, Inc. (BBW - Free Report) , KAR Auction Services, Inc. (KAR - Free Report) , Sally Beauty Holdings, Inc. (SBH - Free Report) , Five Below, Inc. (FIVE - Free Report) and Hibbett Sports, Inc. (HIBB - Free Report) .

Let’s take a look at the industry’s four major themes:

  • The industry’s prospects are correlated with the purchasing power of consumers. Consumer spending activity, one of the pivotal factors driving the economy, regained momentum following the easing of coronavirus-induced lockdowns. Undoubtedly, the gradual reopening of the economy and measures undertaken to support households such as stimulus checks and enhanced unemployment benefits boosted demand. As a result, U.S. retail sales in June climbed 7.5%, following an upwardly revised gain of 18.2% in the month of May. However, market pundits cautioned that the path ahead looks bumpy, given millions of job losses and resurgence of coronavirus cases. Incidentally, new COVID-19 cases are compelling many states to reverse or slow reopening plans, jeopardizing the already-shattered job market. As a result, Consumer Confidence Index, which reached a three-month high in June, retraced in July. Lynn Franco, Senior Director of Economic Indicators at The Conference Board, said “Looking ahead, consumers have grown less optimistic about the short-term outlook for the economy and labor market and remain subdued about their financial prospects. Such uncertainty about the short-term future does not bode well for the recovery, nor for consumer spending.” Experts believe that another new stimulus package and the discovery of a COVID-19 vaccine are paramount to lift consumers’ spirit and spending activity.
     
  • Most companies in the space are working on providing a wide assortment of products, enhancing online experience and adopting a favorable pricing strategy to boost sales. Initiatives such as building omni-channel operations, coming up with reward programs and developing innovative products and services are worthy of mention. Of late, there has been an increase in demand for office supplies, personal care products, domestic merchandise products and fitness-related products, among others. Industry experts pointed that with people largely staying at home and maintaining social distancing, they are converting homes into “staycation spots” and engaging in “solitary recreational activities.” Notably, the companies are looking to fuel sales via targeted marketing.
     
  • With the evolving consumer shopping pattern and behavior, industry participants are playing dual in-store and online roles. In fact, the companies’ digital businesses have played a key role amid the lockdown. Certainly, companies are committed to address the challenges related to the pandemic. In this respect, the industry players are directing resources toward digital platforms, accelerating fleet optimization, augmenting supply chain and focusing on improving financial flexibility. In the current situation, the companies are even offering no-contact delivery option, low-contact pickup service and ship-to-home orders. Companies are investing in renovation, improved checkouts and mobile point-of-sale capabilities to keep stores relevant.
     
  • The brick-and-mortar retail business, which is the model for most companies in the Zacks Retail – Miscellaneous industry, has turned highly competitive since Amazon (AMZN - Free Report) gained dominance over all the business areas and altered the way consumers shop. This has compelled a number of players to strengthen their digital ecosystem and boost shipping and delivery capabilities. While these endeavors drive sales, they entail high costs. Apart from these, any deleverage in SG&A rate, higher labor and occupancy costs, and increased marketing and other store-related expenses might put pressure on margins. Industry experts pointed out that the companies’ bottom line may be impacted by additional employee payments and benefits along with investments undertaken to preserve safety and health of customers and team members amid the coronavirus crisis. Nonetheless, companies are containing costs, optimizing inventory and prioritizing capital expenditures.

Zacks Industry Rank Indicates Dismal Prospects

The Zacks Retail – Miscellaneous industry is a 21-stock group within the broader Zacks Retail – Wholesale sector. The industry currently carries a Zacks Industry Rank #158, which places it in the bottom 38% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since the beginning of the year, the industry’s earnings estimate for the current year has moved down approximately 56.7%.

Despite the industry’s drab near-term prospects, we will present a few stocks that are worth noting. But before that, it’s better to take a look at the industry’s shareholder returns and current valuation first.

Industry Vs Broader Market

The Zacks Retail – Miscellaneous industry has underperformed the broader Retail – Wholesale sector and the Zacks S&P 500 composite over the past year.

The industry has fallen 10.6% over this period against the S&P 500 Index’s rise of 8.4% and the broader sector’s increase of 29.4%.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing retail stocks, the industry is currently trading at 22.16X compared with the S&P 500’s 22.44X and the sector’s 34.02X.

Over the last five years, the industry has traded as high as 24.2X, as low as 11.52X and at the median of 15.98X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

The COVID-19 crisis is a litmus test for all consumer-driven industries. Players in the industry are resorting to location analytics and other data-driven tools to better engage with customers amid the outbreak. Such efforts along with pricing mechanism, inventory management and other operational initiatives should drive sales during this crisis. However, deleverage in the SG&A rate, rents and other operating costs might dent margins.

That said, we are presenting two stocks from the Retail – Miscellaneous space that are well positioned to outperform the market. Of these, the first stock sports a Zacks Rank #1 (Strong Buy) and the next carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

MarineMax, Inc. (HZO - Free Report) : Shares of this recreational boat and yacht retailer have surged about 91.4% in a year. The Zacks Consensus Estimate for the company’s current-fiscal EPS has climbed 67.1% in the past seven days. The company’s bottom line has outperformed the Zacks Consensus Estimate in each of the trailing four quarters.

Price and Consensus: HZO

The ODP Corporation (ODP - Free Report) : For this provider of business services and supplies, products, and technology solutions, the Zacks Consensus Estimate for its current-fiscal EPS has risen by a couple of cents over the last 30 days. The company has a trailing four-quarter earnings surprise of 32.6%, on average, and an estimated long-term earnings growth rate of 6.8%.

Price and Consensus: ODP

We are also presenting two stocks with a Zacks Rank #3 (Hold) that investors may currently retain in their portfolio.

Tractor Supply Company (TSCO - Free Report) : Shares of this rural lifestyle retail store operator have gained approximately 33.7% in a year. The Zacks Consensus Estimate for the company’s current-fiscal EPS has moved 9.2% north in the past seven days. The company has an estimated long-term earnings growth rate of 12.8%. It has a trailing four-quarter earnings surprise of 2.6%, on average.

Price and Consensus: TSCO

DICK'S Sporting Goods, Inc. (DKS - Free Report) : Shares of this sporting goods retailer have gained approximately 25.9% in a year. The Zacks Consensus Estimate for the company’s current-fiscal EPS has moved up 27.3% in the past seven days. The company has an estimated long-term earnings growth rate of 4.1%.

Price and Consensus: DKS

5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

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