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4 Retail-Miscellaneous Stocks With Potential to Beat Industry Blues

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With the decline of stimulus-driven spending and persistently high interest rates, the Retail – Miscellaneous industry finds itself at a pivotal juncture. Inflationary pressures are causing consumers to be more judicious with their disposable income, affecting various merchandise categories and creating hurdles for retailers. The ripple effect of inflation has also led to increased operational costs for retailers, from higher wages to elevated prices for goods and services. Passing these increased costs on to consumers further exacerbates the issue of reduced demand. The ability of the industry to rebound heavily depends on the restoration of consumer purchasing power and confidence.

Nonetheless, the industry participants are proactively addressing the changing consumer environment by emphasizing a superior product strategy, enhancing their omnichannel capabilities and making prudent capital investments. Backed by these initiatives, companies such as Tractor Supply Company (TSCO - Free Report) , DICK'S Sporting Goods, Inc. (DKS - Free Report) , Arhaus, Inc. (ARHS - Free Report) and BARK, Inc. (BARK - Free Report) are well-positioned to seize opportunities that may arise in this changed marketplace.

About the Industry

The Zacks Retail – Miscellaneous industry encompasses a diverse array of retailers, including those specializing in sporting goods, office supplies, specialty products, and domestic merchandise. It also features beauty product retailers offering cosmetics, fragrances, skincare, haircare, and salon styling tools. Additionally, the industry includes rural lifestyle stores, art and craft specialty outlets, and suppliers catering to farmers, ranchers, tradesmen, and small businesses. Recreational boat and yacht retailers, along with specialty value retailers targeting tween and teen customers, are also key players. Profitability within this sector hinges on a balanced pricing strategy, efficient supply chain management, effective merchandising tactics, and continuous innovation to meet consumer demands and maintain competitive positioning in a dynamic market.

4 Key Industry Trends

Soft Demand May Hit Revenues: Elevated interest rates, underlying inflationary pressures and geopolitical concerns continue to threaten consumer spending activity, which is crucial for the retail sector. The industry's outlook heavily relies on consumer purchasing power, now strained by higher prices that are putting pressure on family budgets and dampening demand. This situation is further compounded by a decline in U.S. consumer confidence, reflecting growing pessimism among Americans about current economic conditions. According to the Conference Board, the consumer confidence index fell to 100.4 in June from a revised reading of 101.3 in May.

Pressure on Margins to Linger: Companies in the industry are competing fiercely on price, product variety and speed to market. To gain a competitive edge, they have been accelerating investments to strengthen the digital ecosystem and enhance shipping and delivery capabilities. While these efforts drive sales, they also incur high costs. Additionally, any deleverage in the SG&A rate, higher labor and occupancy costs, and increased marketing and store-related expenses may continue to pressure margins. Nonetheless, companies are focused on initiatives to mitigate cost-related challenges, such as streamlining operational structures, optimizing supply networks and adopting effective pricing policies.

Focus on Boosting Portfolio & Market Reach: Most companies in the sector are focused on expanding their product assortment, enhancing the online shopping experience, and adopting favorable pricing strategies to boost sales. Key initiatives include building robust omnichannel operations, introducing reward programs and developing innovative products and services. There's a noticeable increase in demand for personal care items, domestic merchandise and fitness-related products. To capitalize on these trends, companies are leveraging targeted marketing efforts to fuel sales and broaden their market reach.

Digitization, Key to Growth: With the shift in consumer shopping patterns and behavior, industry participants have been balancing both in-store and online roles. Companies are increasingly directing resources toward digital platforms, accelerating fleet optimization and enhancing their supply chains. Initiatives to expand delivery options, such as curbside pickup and ship-to-home orders, along with contactless payment solutions, have proven beneficial. Retailers are also investing in store renovations, improved checkouts and mobile point-of-sale capabilities to keep physical stores relevant. By focusing on consumers' product preferences and their inclination toward online shopping, retailers are replenishing shelves with in-demand merchandise and ramping up investments in digitization to drive growth.

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 #229, which places it in the bottom 8% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is 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 outperform 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 2024, the industry’s earnings estimate has declined 3.3%.

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 declined 3.6% over this period. Meanwhile, the S&P 500 has risen 26.9%, and the broader sector has increased 22.2% 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 15.74X compared with the S&P 500’s 21.91X and the sector’s 23.01X.

Over the last five years, the industry has traded as high as 22.26X, as low as 10.97X and at the median of 16.21X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

4 Stocks to Watch

DICK'S Sporting Goods: DICK'S Sporting Goods demonstrates strong fundamental health through its successful implementation of an omnichannel strategy that seamlessly integrates online and in-store experiences, significantly enhancing customer engagement and loyalty. The company’s innovative store formats, such as the House of Sport and next-generation stores, are driving increased foot traffic and sales. Additionally, strategic partnerships with leading brands and the success of its own vertical brands provide a competitive edge in key product categories. Robust investments in digital capabilities, particularly through the GameChanger digital platform, position DICK'S to capitalize on the growing youth sports market.

DICK'S Sporting Goods has a trailing four-quarter earnings surprise of 4.7%, on average. The Zacks Consensus Estimate for current financial-year revenues and EPS suggests growth of 1.8% and 6.6%, respectively, from the year-ago reported figure. Shares of this Zacks Rank #2 (Buy) company have jumped 46% in the past year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: DKS

BARK: The strong market position and innovative approach to the pet industry underpin BARK's success. The company's subscription-based business model, which offers curated pet products and services, ensures a steady revenue stream and fosters customer loyalty. BARK's strategic partnerships and expanding product lines reflect its ability to adapt and grow within the evolving pet market. Additionally, the company’s commitment to enhancing customer experience through personalized offerings and digital engagement positions it favorably for sustained growth.

The Zacks Consensus Estimate for the current financial year's top and bottom lines implies growth of 1.8% and 72.7%, respectively, from the year-ago reported figure. Shares of this Zacks Rank #2 company have risen 6.5% in the past year.

Price and Consensus: BARK

Tractor Supply: Tractor Supply's proactive strategies, including the expansion of its Neighbor's Club loyalty program and strong market position in pet food and livestock feed categories, highlight its resilience and competitive edge within the retail sector. Coupled with robust digital sales growth and continuous operational efficiencies, these elements reinforce Tractor Supply's position. The company's adept management of market dynamics and focus on customer-centric innovations underscore its potential for long-term growth and value creation.

Tractor Supply has a trailing four-quarter earnings surprise of 2.7%, on average. The Zacks Consensus Estimate for current financial-year revenues and EPS suggests growth of 3% and 2.5%, respectively, from the year-ago reported figure. Shares of this Zacks Rank #3 (Hold) company have risen 15.4% in the past year.

Price and Consensus: TSCO

Arhaus: Strong demand, successful product launches, showroom expansions and geographic diversification collectively serve as robust pillars for Arhaus’ current success and future growth prospects. The company places a paramount focus on enhancing the client experience, with plans to augment its capabilities by hiring additional in-home designers and optimizing the final-mile delivery process. Arhaus' investments in warehouse management and logistics highlight its commitment to operational efficiency, enhancing its competitive edge.

This lifestyle brand and omnichannel retailer of premium home furnishings has a trailing four-quarter earnings surprise of 131.6%, on average. The Zacks Consensus Estimate for current financial-year revenues indicates growth of 5.6% from the year-ago reported figure. This Zacks Rank #3 stock has rallied 31.5% in the past year.

Price and Consensus: ARHS

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