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Is Coronavirus Putting Miscellaneous Retail Industry in Peril?

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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 auction and salvage auction services. Some of the prominent names in the industry are Ulta Beauty, Inc. (ULTA - Free Report) , Bed Bath & Beyond Inc. (BBBY - Free Report) , KAR Auction Services, Inc. (KAR - 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. We note that consumer spending activity, which is one of the pivotal factors driving the economy, has somewhat slowed down. A clear evidence of the same was visible from U.S. retail sales data for the month of February that shows the biggest drop since December 2018. We expect more pain ahead as Americans are restricting their purchases to essential items and avoiding public places amid the coronavirus outbreak. With consumer sentiment falling to 89.1 in March, its lowest level since October 2016, the possibility of near-term revival in spending activity looks bleak.
  • The pandemic has been leading to supply-chain bottlenecks, slowdown in production activities and reduced demand for several commodities. In the view of implementation of safety measures and drop in store footfall, companies are temporarily shutting down their brick-and-mortar stores, curtailing work hours and operating in shifts, or permitting employees to work remotely. This will not only hurt sales and productivity but will also likely escalate cost burden as many companies said that they will continue to give full payments and benefits to their employees during the temporary closure.
  • 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 like building omni-channel operations, coming up with reward programs and developing innovative products and services are worthy of mention. As people are choosing to work from home and maintain social distancing due to the pandemic, demand for office supplies and other personal care products has increased. The companies are also looking to curtail costs, lower risks in supply chain management, boost sales via targeted marketing and optimize business processes.
  • 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) gained dominance over all the business areas and altered the way consumers shop. Also, the deadly COVID-19 has compelled people to stay home, spurring online sales. As a result, companies have been focusing on bolstering their omnichannel operations. To that end, they are constantly engaged in digital innovation. While these endeavors could boost sales, they entail high costs. Apart from these, higher marketing, advertising and other store-related expenses despite pandemic-induced closures might compress margins.

Zacks Industry Rank Indicates Dismal Prospects

The Zacks Retail – Miscellaneous industry is a 16-stock group within the broader Zacks Retail – Wholesale sector. The industry currently carries a Zacks Industry Rank #190, which places it in the bottom 25% 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 17%.

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 44.1% over this period compared with the S&P 500 Index’s decline of 8.7% and the broader sector’s decrease of 3.9%.

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 11.62X compared with the S&P 500’s 16.03X and the sector’s 23.04X.

Over the last five years, the industry has traded as high as 17.63X, as low as 11.62X and at the median of 14.18X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

A few companies in the industry are resorting to location analytics and other data-driven tools to better engage with customers amid the coronavirus 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.

Build-A-Bear Workshop, Inc. (BBW - Free Report) : For this specialty retailer of plush animals and related products, the Zacks Consensus Estimate for its current-fiscal EPS has moved up 22.2% over the last 30 days. Moreover, the company’s bottom line has outperformed the Zacks Consensus Estimate by 29% in the last reported quarter.

Price and Consensus: BBW

DICK'S Sporting Goods, Inc. (DKS - Free Report) : The sporting goods retailer’s bottom line has outperformed the Zacks Consensus Estimate by 13.6%, on average, in the trailing four quarters. The company has an estimated long-term earnings growth rate of 7.2%.

Price and Consensus: DKS


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

Office Depot, Inc. (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 been stable over the last seven days. Moreover, the company’s bottom line has outperformed the Zacks Consensus Estimate by 24.3%, on average, in the trailing four quarters. The company has an estimated long-term earnings growth rate of 12.3%.
Price and Consensus: ODP

Tractor Supply Company (TSCO - Free Report) : The Zacks Consensus Estimate for the company’s current-fiscal EPS has been stable over the last seven days. Moreover, the company’s bottom line has outperformed the Zacks Consensus Estimate by 2.6%, on average, in the trailing four quarters. The company has an estimated long-term earnings growth rate of 11.6%. Notably, in the past three months, shares of this rural lifestyle retail store operator have outperformed the industry.

Price and Consensus: TSCO


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