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4 Retail Stocks Poised to Continue Their Winning Streak in 2021

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In spite of lingering apprehensions associated with the ongoing coronavirus crisis, the Retail – Wholesale sector has been steadily making its way out of the woods. Once struggling to hold its ground, the sector has advanced 38.3% so far this year compared with the S&P 500 index’s rally of 15%. Well, thanks to consumers’ increasing appetite for shopping.

Undoubtedly, the COVID-19 outbreak and associated lockdowns did wreak havoc, took a toll on employment and household income, and left consumers with no option but to curtail discretionary spending. But things started to turn in favor following measures undertaken to support households coupled with resumption of economic activities.

Impressively, the sector now carries a Zacks Sector Rank #3, and occupies position in the top 19% of 16 Zacks sector list. In fact, per the latest Earnings Outlook, the sector is anticipated to witness top-line growth of 5.6%, with bottom line expected to improve 20.5% in 2021.

That said, let’s check out the three major driving forces for 2021.

Omni-Channel Ecosystem

The coronavirus pandemic has certainly changed the very dynamics of the way people live, procure and consume products. The retail sector, being an integral part of every lifestyle, has witnessed sea change in the way it functions. Markedly, retailers are making strategic investments to provide consumers fast, convenient and safe shopping experience, be it offline or online.

Companies have been deepening engagements with consumers via social media, creating innovative and compelling products, and enhancing digital capabilities. Clearly, launch of newer styles, customization options and refreshed store environments are likely to boost growth.

It is quite apparent that retailers need to play dual in-store and online roles. Companies have been directing resources toward digital platforms, accelerating fleet optimization and augmenting 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 amid the pandemic. Additionally, retailers have been investing in renovation, improved checkouts and mobile point-of-sale capabilities to keep stores relevant.

Consumer Spending Activity

The sector’s prospects are correlated with the purchasing power of consumers. Consumer spending activity, which is one of the pivotal factors driving the economy, has been strong. However, of late, resurgence in COVID-19 cases, reimposition of restrictions in some states and fading of the initial coronavirus-relief package compelled Americans to tighten their purse strings. Incidentally, U.S. retail sales declined for a second successive month in November.

Economists have been warning that once extra unemployment benefits end, consumer spending activity may drop. Again, moderation in hiring activity and increase in the number of new unemployment claims have been hurting consumer sentiment, and in turn the willingness to spend. Clearly, these necessitate more financial support to keep the economic momentum alive. Rise in consumer spending activity is vital for any economy.

Stimulus Deal

Well, hopes have risen on another stimulus as lawmakers push for a new $900-billion coronavirus relief package that also includes stimulus checks for individuals, per media reports. If all goes well, this would provide financial assistance to businesses and households that have been bearing the brunt of the coronavirus crisis. Also, mass vaccination will lend the much-needed support to the economy.

Successful vaccination drive will prove to be a game changer for the economy in 2021 battered by the COIVD-19 outbreak. Since the imposition of lockdown and shelter-in-place restrictions in March, the U.S. economy has been operating at a sub-optimal level. Reopening of the economy with the easing of the pandemic will significantly boost spending.

4 Prominent Picks

We have shortlisted four retail stocks that carry a Zacks Rank #1 (Strong Buy) or 2 (Buy) and are up more than 20% so far this year. You can see the complete list of today’s Zacks #1 Rank stocks here.

Investors can count on L Brands, Inc. , specialty retailer of women's intimate and other apparel, personal care, and beauty and home fragrance products. The company remains focused on containing costs, managing inventory and optimizing capital expenditures. It is on track with its previously announced profit improvement plan and intends to generate approximately $400 million in annual savings. L Brands continues to revamp its business by staying customer-focused, enriching assortments, and enhancing store and online experiences. Strength at Bath & Body Works segment and improved performance at Victoria’s Secret drove third-quarter fiscal 2020 results. Markedly, shares of this Zacks Rank #1 company have surged 116.3% so far this year. Also, the Zacks Consensus Estimate for fiscal 2021 earnings has moved up 31.9% in the past 30 days. The company has an estimated long-term earnings growth rate of 13%.

Builders FirstSource, Inc. (BLDR - Free Report) is a Dallas, TX-based supplier and manufacturer of building materials. The company is gaining from higher demand for its integrated services, backed by improved housing market and shift to suburban living. This Zacks Rank #2 company has been active on the acquisition front, which is supporting the top line. It is also engaged in disciplined cost-management practices. In August 2020, the company entered into a definitive merger agreement with BMC Stock Holdings that will create the nation's premier supplier of building materials and services. The Zacks Consensus Estimate for 2021 earnings has been revised upward by 4.4% in the past 30 days. Impressively, the stock has rallied about 50.2% year-to-date.

Target Corporation (TGT - Free Report) is also worth betting on. This general merchandise retailer has been making investments to enhance omni-channel capacities, come up with new brands, and remodel or refurbish stores to cater to consumer demand and behavior in the new normal. The company has been consolidating its position in the food and beverage space with a robust portfolio of owned and exclusive brands. The company’s commitment to offer unique shopping experience with safe and convenient options, including contactless Drive Up and Order Pickup, and same-day delivery with Shipt, are worth a mention. We also note that shares of this Zacks Rank #2 company have surged 33.6% year-to-date. Also, the Zacks Consensus Estimate for fiscal 2021 earnings has jumped 7.6% in the past 30 days.  The company has an estimated long-term earnings growth rate of 8.5%.

You may consider Five Below, Inc. (FIVE - Free Report) . The company’s digital strategy, expansion of supply chain network, enhancement of overall distribution capabilities and focus on merchandise assortment bode well. This specialty value retailer has been effectively meeting customer demand for products relevant in this pandemic-hit environment. Moreover, it has expanded checkout capabilities in a bid to make shopping convenient. Markedly, the company is now offering same-day delivery service in roughly 300 stores. The company has an estimated long-term earnings growth rate of 21%. We also note that shares of this Zacks Rank #2 company have advanced 27.9% so far in the year. Remarkably, the Zacks Consensus Estimate for fiscal 2021 earnings has risen 3.9% in the past 30 days.

Zacks Top 10 Stocks for 2021

In addition to the stocks discussed above, would you like to know about our 10 top tickers for the entirety of 2021?

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