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5 Retail-Miscellaneous Stocks to Safeguard Against Industry Woes

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Product cost inflation, tight labor market and supply-chain issues are some of the headwinds that players in the Zacks Retail – Miscellaneous industry have been encountering lately. These along with geopolitical turbulence, thanks to the conflict between Russia and Ukraine, have dampened consumers’ spirits.

That said, industry participants have been focusing on superior product strategy, advancement of omni-channel capabilities and prudent capital investments to strike the right chord with consumers. Ulta Beauty, Inc. (ULTA - Free Report) , Tractor Supply Company (TSCO - Free Report) , DICK'S Sporting Goods, Inc. (DKS - Free Report) , Arhaus, Inc. (ARHS - Free Report) and MarineMax, Inc. (HZO - Free Report) look well poised, courtesy of their business operating model and opportunities ahead.

About the Industry

The Zacks Retail – Miscellaneous industry covers retailers of sporting goods, office supplies, and specialty products as well as sellers of a wide range of domestic merchandise. It also includes retailers of beauty products providing cosmetics, fragrances, skincare and haircare products, and salon styling tools. Some of the industry participants operate rural lifestyle retail stores, and arts and crafts specialty outlets, and sell their products to farmers, ranchers, and others as well as tradesmen and small businesses. The industry also comprises recreational boat and yacht retailers as well as specialty value retailers offering a broad range of trend-right, high-quality merchandise targeted at tween and teen customers. The players' profitability depends on a prudent pricing model, a well-organized supply chain, and an effective merchandising strategy.

4 Key Industry Trends

Pressure on Margins to Linger: Companies in the industry are vying for a bigger share on attributes such as price, products and speed to market. They have been accelerating investments to strengthen the 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 build pressure on margins. Of late, the industry participants have been dealing with high labor costs amid the tight labor market, increased freight costs, and supply-chain issues. Nonetheless, companies have been focused on undertaking initiatives to mitigate cost-related challenges. These include streamlining operational structures, optimizing supply networks as well as adopting effective pricing policies.

Soft Consumer Activity May Hit Revenues: Elevating prices and geopolitical concerns continue to pose a threat to consumer spending activity. Undoubtedly, the industry’s prospects are correlated with the purchasing power of consumers. But higher gasoline and food prices have been discomforting the family budgets. The consumer price index rose to 8.5% in July 2022 on a year-over-year basis. The Fed’s aggressive rate hikes to tame inflation and cool off an overheated economy are making things tough for consumers by squeezing disposable income.

Focus on Boosting Portfolio & Market Reach: Most companies in the space are working on providing a wide assortment of products, enhancing the 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 worth mentioning. There has been an increase in demand for office supplies, personal care items, domestic merchandise products and fitness-related products. Companies are looking to fuel sales via targeted marketing.

Digitization Key to Growth: With the change in consumer shopping patterns and behavior, industry participants have been playing dual in-store and online roles. In this respect, the industry players have been directing resources toward digital platforms, accelerating fleet optimization and augmenting the supply chain. In fact, companies’ initiatives to expand delivery options — curbside pickup or ship-to-home orders — and contactless payment solutions have been a boon. Additionally, retailers are investing in renovation, improved checkouts and mobile point-of-sale capabilities to keep stores relevant. Keeping in mind consumers’ product preferences and inclination toward online shopping, retailers are replenishing shelves with in-demand merchandise and ramping up investments in digitization.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Retail – Miscellaneous industry is housed within the broader Zacks Retail – Wholesale sector. The industry currently carries a Zacks Industry Rank #165, which places it in the bottom 35% 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 drab 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 positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Since the beginning of May 2022, the industry’s earnings estimate has declined 12.3%.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

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 24.4% over this period compared with the S&P 500’s decline of 14.3% and the broader sector’s decline of 26.1% in the said time frame.

One-Year Price Performance

Industry's Current Valuation

On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing retail stocks, the industry is currently trading at 13.64X compared with the S&P 500’s 16.92X and the sector’s 22.12X.

Over the last five years, the industry has traded as high as 24.96X, as low as 11.28X and at the median of 16.25X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

5 Retail - Miscellaneous Stocks

Ulta Beauty: The company has been strengthening its omni-channel business and exploring the potential of both physical and digital facets. It has been implementing various tools to enhance guests' experience, like offering a virtual try-on tool and in-store education, and reimagining fixtures, among others. Ulta Beauty focuses on offering customers a curated and exclusive range of beauty products through innovation.

This beauty retailer and the premier beauty destination for cosmetics, fragrance, skincare products, hair care products and salon services has a trailing four-quarter earnings surprise of 32.8%, on average. Ulta Beauty has an estimated long-term earnings growth rate of 11.9%. The Zacks Consensus Estimate for its current-fiscal EPS has risen 6.4% in the past 30 days. Shares of this Zacks Rank #1 (Strong Buy) company have risen 13.7% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: ULTA

DICK'S Sporting Goods: Favorable customer demand, a solid product portfolio and strength in the online platform have been contributing to DICK'S Sporting Goods’ upbeat performance. The company remains optimistic about the demand trends in athletic apparel, footwear, team sports and golf.

The Zacks Consensus Estimate for DICK'S Sporting’s current-fiscal EPS has moved up 5.2% in the past 30 days. This Zacks Rank #2 (Buy) company has a trailing four-quarter earnings surprise of 21.4%, on average, and an estimated long-term earnings growth rate of 5%. Shares of this sporting goods retailer have declined approximately 21.3% in the past year.

Price and Consensus: DKS

Arhaus: Strong consumer demand, new collections, brand awareness and ramp-up of new showrooms have been driving Arhaus’ top-line performance. The company plans to have 165 total traditional showrooms over the period from the current count of 80 showrooms, with plans to add five to seven new traditional showrooms per year. Arhaus estimates fiscal 2022 net revenues in the band of $1,173 million to $1,193 million and foresees comparable growth in the bracket of 43% to 48%.

The Zacks Consensus Estimate for Arhaus’ current-fiscal EPS has moved up 17.7% in the past 30 days. This Zacks Rank #2 company has a trailing four-quarter earnings surprise of 92%, on average, and an estimated long-term earnings growth rate of 14.3%. Shares of this lifestyle brand and premium retailer have fallen 30.3% in the past year.

Price and Consensus: ARHS

Tractor Supply Company: This largest rural lifestyle retailer in the United States has been benefiting from its robust business strategies, "Life Out Here" and everyday low pricing, as well as favorable consumer demand for product categories. In addition, Tractor Supply's Neighbor's Club loyalty program remains sturdy. Its omni-channel initiatives, including curbside pickup and same-day delivery, have been aiding digital sales. We note that strength in everyday merchandise, including consumable, usable and edible products, has been fueling sales.

Tractor Supply has a trailing four-quarter earnings surprise of 10.2%, on average. The company has an estimated long-term earnings growth rate of 10.2%. The Zacks Consensus Estimate for its current-fiscal EPS has risen 0.6% in the past 60 days. Shares of this Zacks Rank #3 (Hold) company have declined 5.7% in the past year.

Price and Consensus: TSCO

MarineMax: Significant geographic reach, product diversification and stellar demand bode well for this world’s largest recreational boat and yacht retailer. MarineMax has been benefiting as consumers embrace and enjoy the boating lifestyle. The company’s digitization endeavors have been helping it better engage with customers. The company’s investments in high-margin businesses such as finance, insurance, brokerage, marina and service operations bode well. Impressively, its strategic acquisitions have been playing a major role in driving the top line.

This Zacks Rank #3 company has a trailing four-quarter earnings surprise of 27.6%, on average. The Zacks Consensus Estimate for its current-fiscal EPS has risen 0.6% in the past 60 days. Shares of MarineMax have declined 26.7% in the past year.

Price and Consensus: HZO

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