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Forget Target (TGT), These are the Best Retail Stocks to Buy
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Target (TGT - Free Report) stock is down 6% so far today after posting poor results from the second quarter. Sales presence is critical for any retailer, so it was disappointing to see that the company missed revenue expectations. Target posted sales of $16.169 billion for the quarter, missing our consensus estimate of $16.245 billion. Comparable sales fell 1.1%, and quarterly sales decreased by 7.2% compared to Q2 of 2015.
Target’s net earnings movement is especially concerning. The company’s income for the first half of 2016 is down 5.5% year-over-year, and net income for the second quarter decreased by 9.7% over comparable quarters. This retailer does not appear to be headed in the right direction, as full year EPS guidance has fallen to a range between $4.36 and $4.76, down from its previous forecast calling for EPS between $4.76 and $4.96.
With all this, Target’s future looks uncertain. For now, it may be best to ditch TGT shares and focus on better corporations in the retail space. Below, I list three of my favorite retail stocks and pose arguments for why they are outstanding picks right now.
Dick’s is the largest peer in the sports retail space, and it has consistently grown sales over each of the last 10 years. With the liquidation of Sports Authority, Dick’s will have the opportunity to pick up some of the billions of dollars worth of annual sales which the bankrupt retailer previously generated. The company posted better than expected Q2 results, and this may suggest that DKS is already benefitting from Sports Authority’s retreat from the sports retail industry.
Sales grew by about 8% over comparable quarters, with revenues coming in at $1.967 billion. This topped our sales estimate of $1.885 billion by 4.42%. Dick’s beat our consensus estimate on the income front as well, posting earnings of $0.82 per share versus our EPS estimate of $0.68. This represents a solid 20.59% beat, and there’s good reason to believe that the company will continue to surpass expectations since it has a good track record of surpassing our EPS consensus estimate. The company’s full year EPS guidance was raised to $2.90-$3.05, and this is up from Dick’s guidance three months ago calling for EPS between $2.60 and $2.90.
Dick’s has a strong and growing e-commerce presence, with online sales accounting for 8.5% of total sales compared to 7.3% over comparable quarters. E-commerce penetration will be essential to brick-and-mortar retailers, so it is assuring to see that online sales represent a good chunk of Dick’s total sales. This contrasts with Target, whose online business only accounted for 3.3% of total sales in the second quarter. DKS stands to pick up sales as the void that Sports Authority left behind becomes more apparent. Right now, Dick’s stock is a Zacks Rank #3 (Hold), but this could change in the near future as analysts digest and assess the company’s recent earnings beat.
Unlike Dick’s, Walmart has not posted its earnings results yet. The company is slated to report its quarterly earnings on Thursday, but there’s good reason to believe that the company will top expectations. WMT is currently trading at an 18% discount relative to its share price in mid-January of 2015, and there’s a good chance that a positive earnings release will give Walmart’s stock a lot of positive momentum.
The low-cost retailer is a Zacks Rank #2 (Buy), and it has a grade of “A” for value in our Style Scores. Over the last 60 days, four analysts have revised their earnings estimates for Walmart’s second quarter. Each of those analysts pushed their EPS expectations upwards, and two of those revisions were made within the last month. Also, WMT has a positive Earnings ESP (Expected Surprise Prediction), so it has a very strong chance of surpassing our quarterly earnings expectations. The retailer has beaten our EPS consensus estimate over each of the last three quarters, so hopefully the streak lives on after the earnings release on Thursday.
The corporation’s growth appears to have stagnated in recent history, but that doesn’t change the fact that WMT is consistently generating close to a half-trillion dollars in sales every year over the last half-a-decade or so. This is crucial because Walmart relies on high sales levels to generate strong cash flows on slimmer profit margins. It is everyone’s go-to discount retailer, and that shouldn’t change any time soon. Walmart does hope to capture business in the e-commerce space, and the store’s recent acquisition of Jet.com has a lot of potential in helping it compete with Amazon (AMZN - Free Report) for online dollars.
Free cash flows generated by the business are strong enough to deliver more returns to investors annually in the form of dividends. At the current share price, investors are earning an annual dividend yield of 2.74%, and this yield stands to grow significantly over time if you lock in shares at these prices. Proof of this is the fact that the dividend payment per share has grown by 65% since 2010. Walmart distributed about $7 billion to shareholders in fiscal 2016, and free cash flows amounted to $15.912 billion, so the company could easily afford to raise its dividend payout significantly.
Yesterday morning, Home Depot reported results from its second quarter of 2016. The home improvement retailer beat earnings estimates by $0.01, posting EPS of $1.97 for the quarter. Along with the bottom line, Home Depot surpassed our sales estimate by a slim margin, and it posted revenues of $26.437 billion. The beats were thin, but this company is still a buy for a few reasons.
The company is heading in the right direction on the sales front, albeit at a slower pace. According to Forbes, same-store sales grew at the slowest rate (5.4%) in nine quarters. Comparable store sales increased by 6.6% compared to Q2 of 2015, but they grew at a slower pace compared to the comps growth that the company has experienced over the last 10 quarters. Sales guidance remained consistent, with revenues growth of 6.3% forecasted for this year.
The bottom line, on the other hand, did see improved guidance, with EPS expected to grow 15.6% year-over-year, up from its previous estimated growth rate of 14.8%. Compared to the first half of 2015, HD reported a 15% increase for operating income over the first two quarters of 2016. This is mostly attributable towards higher sales numbers coupled with only 2.6% growth in total operating expenses over that time frame. As gross profits increase, more of those dollars trickle down to the bottom line since operating expenses grow at a slow rate. This makes the stock a very attractive prospect to hold onto for the long run, especially since it has a consistent record of growing sales over time.
Home Depot has delivered massive sales numbers over the years, and this has helped it to become a cash flow giant. The company has shown devotion towards delivering returns to shareholders through dedicating billions of dollars towards share buy-backs every year. The home improvement retailer has also done well in increasing its quarterly dividend every year for over 7 years. The stock currently yields about 2%, which isn’t exactly impressive, but because of the stock’s strong free cash flows generated, it stands to keep increasing its cash payout per share significantly in the years to come.
Home Depot definitely looks like a worthy buy for the long run, but there’s reason to bet on the stock in the short term as well. Home Depot stands to benefit from the bullish housing market, and this industry has a strong relationship with sales in the home improvement market. Existing home sales are up 5% year-over-year in the first half of 2016, and if the pace does pick up, it is possible that Home Depot will benefit from this trend. Home Depot (HD - Free Report) is a Zacks Rank #2 (Buy).
Bottom Line
Each of the recommended stocks above are the respective leaders within their space of the retail market. Home Depot and Dick’s stand to see continued growth on the sales and earnings front, and Walmart is a dominant leader that should bring massive gains to investors over time in the form of dividends and share buybacks. These picks look promising over the short term because of their Zacks Rank and earnings beats, but their dominance in their respective markets should propel them forward over the long run as well.
The Zacks Rank is a truly marvelous trading tool. Our ranking system has beaten the S&P 500, yielding an average return of 25% per year for the last 29 years! Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
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Forget Target (TGT), These are the Best Retail Stocks to Buy
Target (TGT - Free Report) stock is down 6% so far today after posting poor results from the second quarter. Sales presence is critical for any retailer, so it was disappointing to see that the company missed revenue expectations. Target posted sales of $16.169 billion for the quarter, missing our consensus estimate of $16.245 billion. Comparable sales fell 1.1%, and quarterly sales decreased by 7.2% compared to Q2 of 2015.
Target’s net earnings movement is especially concerning. The company’s income for the first half of 2016 is down 5.5% year-over-year, and net income for the second quarter decreased by 9.7% over comparable quarters. This retailer does not appear to be headed in the right direction, as full year EPS guidance has fallen to a range between $4.36 and $4.76, down from its previous forecast calling for EPS between $4.76 and $4.96.
With all this, Target’s future looks uncertain. For now, it may be best to ditch TGT shares and focus on better corporations in the retail space. Below, I list three of my favorite retail stocks and pose arguments for why they are outstanding picks right now.
Dick’s Sporting Goods Inc-(DKS - Free Report)
Dick’s is the largest peer in the sports retail space, and it has consistently grown sales over each of the last 10 years. With the liquidation of Sports Authority, Dick’s will have the opportunity to pick up some of the billions of dollars worth of annual sales which the bankrupt retailer previously generated. The company posted better than expected Q2 results, and this may suggest that DKS is already benefitting from Sports Authority’s retreat from the sports retail industry.
Sales grew by about 8% over comparable quarters, with revenues coming in at $1.967 billion. This topped our sales estimate of $1.885 billion by 4.42%. Dick’s beat our consensus estimate on the income front as well, posting earnings of $0.82 per share versus our EPS estimate of $0.68. This represents a solid 20.59% beat, and there’s good reason to believe that the company will continue to surpass expectations since it has a good track record of surpassing our EPS consensus estimate. The company’s full year EPS guidance was raised to $2.90-$3.05, and this is up from Dick’s guidance three months ago calling for EPS between $2.60 and $2.90.
Dick’s has a strong and growing e-commerce presence, with online sales accounting for 8.5% of total sales compared to 7.3% over comparable quarters. E-commerce penetration will be essential to brick-and-mortar retailers, so it is assuring to see that online sales represent a good chunk of Dick’s total sales. This contrasts with Target, whose online business only accounted for 3.3% of total sales in the second quarter. DKS stands to pick up sales as the void that Sports Authority left behind becomes more apparent. Right now, Dick’s stock is a Zacks Rank #3 (Hold), but this could change in the near future as analysts digest and assess the company’s recent earnings beat.
Wal-Mart Stores Inc-(WMT - Free Report)
Unlike Dick’s, Walmart has not posted its earnings results yet. The company is slated to report its quarterly earnings on Thursday, but there’s good reason to believe that the company will top expectations. WMT is currently trading at an 18% discount relative to its share price in mid-January of 2015, and there’s a good chance that a positive earnings release will give Walmart’s stock a lot of positive momentum.
The low-cost retailer is a Zacks Rank #2 (Buy), and it has a grade of “A” for value in our Style Scores. Over the last 60 days, four analysts have revised their earnings estimates for Walmart’s second quarter. Each of those analysts pushed their EPS expectations upwards, and two of those revisions were made within the last month. Also, WMT has a positive Earnings ESP (Expected Surprise Prediction), so it has a very strong chance of surpassing our quarterly earnings expectations. The retailer has beaten our EPS consensus estimate over each of the last three quarters, so hopefully the streak lives on after the earnings release on Thursday.
The corporation’s growth appears to have stagnated in recent history, but that doesn’t change the fact that WMT is consistently generating close to a half-trillion dollars in sales every year over the last half-a-decade or so. This is crucial because Walmart relies on high sales levels to generate strong cash flows on slimmer profit margins. It is everyone’s go-to discount retailer, and that shouldn’t change any time soon. Walmart does hope to capture business in the e-commerce space, and the store’s recent acquisition of Jet.com has a lot of potential in helping it compete with Amazon (AMZN - Free Report) for online dollars.
Free cash flows generated by the business are strong enough to deliver more returns to investors annually in the form of dividends. At the current share price, investors are earning an annual dividend yield of 2.74%, and this yield stands to grow significantly over time if you lock in shares at these prices. Proof of this is the fact that the dividend payment per share has grown by 65% since 2010. Walmart distributed about $7 billion to shareholders in fiscal 2016, and free cash flows amounted to $15.912 billion, so the company could easily afford to raise its dividend payout significantly.
The Home Depot-(HD - Free Report)
Yesterday morning, Home Depot reported results from its second quarter of 2016. The home improvement retailer beat earnings estimates by $0.01, posting EPS of $1.97 for the quarter. Along with the bottom line, Home Depot surpassed our sales estimate by a slim margin, and it posted revenues of $26.437 billion. The beats were thin, but this company is still a buy for a few reasons.
The company is heading in the right direction on the sales front, albeit at a slower pace. According to Forbes, same-store sales grew at the slowest rate (5.4%) in nine quarters. Comparable store sales increased by 6.6% compared to Q2 of 2015, but they grew at a slower pace compared to the comps growth that the company has experienced over the last 10 quarters. Sales guidance remained consistent, with revenues growth of 6.3% forecasted for this year.
The bottom line, on the other hand, did see improved guidance, with EPS expected to grow 15.6% year-over-year, up from its previous estimated growth rate of 14.8%. Compared to the first half of 2015, HD reported a 15% increase for operating income over the first two quarters of 2016. This is mostly attributable towards higher sales numbers coupled with only 2.6% growth in total operating expenses over that time frame. As gross profits increase, more of those dollars trickle down to the bottom line since operating expenses grow at a slow rate. This makes the stock a very attractive prospect to hold onto for the long run, especially since it has a consistent record of growing sales over time.
Home Depot has delivered massive sales numbers over the years, and this has helped it to become a cash flow giant. The company has shown devotion towards delivering returns to shareholders through dedicating billions of dollars towards share buy-backs every year. The home improvement retailer has also done well in increasing its quarterly dividend every year for over 7 years. The stock currently yields about 2%, which isn’t exactly impressive, but because of the stock’s strong free cash flows generated, it stands to keep increasing its cash payout per share significantly in the years to come.
Home Depot definitely looks like a worthy buy for the long run, but there’s reason to bet on the stock in the short term as well. Home Depot stands to benefit from the bullish housing market, and this industry has a strong relationship with sales in the home improvement market. Existing home sales are up 5% year-over-year in the first half of 2016, and if the pace does pick up, it is possible that Home Depot will benefit from this trend. Home Depot (HD - Free Report) is a Zacks Rank #2 (Buy).
Bottom Line
Each of the recommended stocks above are the respective leaders within their space of the retail market. Home Depot and Dick’s stand to see continued growth on the sales and earnings front, and Walmart is a dominant leader that should bring massive gains to investors over time in the form of dividends and share buybacks. These picks look promising over the short term because of their Zacks Rank and earnings beats, but their dominance in their respective markets should propel them forward over the long run as well.
The Zacks Rank is a truly marvelous trading tool. Our ranking system has beaten the S&P 500, yielding an average return of 25% per year for the last 29 years! Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>