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4 Retail-Miscellaneous Stocks With Potential to Beat Industry Blues

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A slowing economy and recessionary fears have hit consumer sentiment. As a result, U.S. consumer confidence dropped in April. Inflation and recession-wary shoppers have curtailed spending. Underlying price pressure, a slowing labor market and a higher interest rate environment have cooled demand. Of late, players in the Zacks Retail – Miscellaneous industry have been encountering these headwinds.

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. Tractor Supply Company (TSCO - Free Report) , DICK'S Sporting Goods, Inc. (DKS - Free Report) , Five Below, Inc. (FIVE - Free Report) and Arhaus, Inc. (ARHS - 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. 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.

Consumer Confidence Slid: Concerns related to a slowing economy and a possible recession have hit consumers’ sentiments that slid to a nine-month low in April. Per Conference Board data, the Consumer Confidence Index nudged down to 101.3 in April from 104 in March. A slump in consumers' confidence may have a direct impact on consumer spending, which accounts for over two-thirds of U.S. economic activity. Also, the Fed’s aggressive rate hikes to tame inflation made things tough for consumers by squeezing disposable income. Consequently, demand has softened.

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 #203, which places it in the bottom 19% 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 January 2023, the industry’s earnings estimate has declined 5.5%.

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 outperformed the broader Retail – Wholesale sector and the Zacks S&P 500 composite over the past year.

The industry has gained 17.7% over this period. Meanwhile, the S&P 500 has risen 2.9% and the broader sector has increased 3.4% 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 14.78X compared with the S&P 500’s 18.48X and the sector’s 21.62X.

Over the last five years, the industry has traded as high as 22.25X, as low as 10.98X and at the median of 16.80X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

4 Retail - Miscellaneous Stocks

Five Below: The company’s strategic endeavors and value-oriented offerings position it well amid a price-sensitive environment. Five Below has been focusing on enhancing merchandise assortment, improving the supply chain, strengthening digital capabilities as well as delivering better WOW products, including the Five Beyond offering.

This extreme-value retailer for tweens, teens and beyond has a trailing four-quarter earnings surprise of 26.3%, on average. Five Below has an estimated long-term earnings growth rate of 22.3%. The Zacks Consensus Estimate for current financial-year revenues and EPS suggests growth of 16.1% and 19.4%, respectively, from the year-ago reported figure. Shares of this Zacks Rank #2 (Buy) company have risen 37% in the past year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: FIVE

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 current financial-year revenues and EPS suggests growth of 2.8% and 11.7%, respectively, from the year-ago reported figure. This Zacks Rank #3 (Hold) company has a trailing four-quarter earnings surprise of 7.1%, on average, and an estimated long-term earnings growth rate of 5.4%. Shares of this sporting goods retailer have rallied approximately 46.4% 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. Markedly, a stellar debt-free balance sheet allows it to navigate the economic upheavals. Arhaus estimates fiscal 2023 net revenues in the band of $1,240 million to $1,300 million and foresees net income between $95 million and $110 million.

The Zacks Consensus Estimate for current financial-year revenues suggests growth of 2.9% from the year-ago reported figure. This Zacks Rank #3 company has a trailing four-quarter earnings surprise of 82.4%, on average. Shares of this lifestyle brand and omni-channel retailer of premium home furnishings have increased 21.4% 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.

The Zacks Consensus Estimate for current financial-year revenues and EPS suggests growth of 7.3% and 8%, respectively, from the year-ago reported figure. The company has an estimated long-term earnings growth rate of 9.6%. Shares of this Zacks Rank #3 company have advanced 17.5% in the past year.

Price and Consensus: TSCO

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