2 Retail Stocks to Buy in March, 2 to Avoid

Given rising consumer spending and the strong possibility of an economic recovery this year, investors should consider betting on the retail sector’s recovery. The sector was badly impacted by the COVID-19 pandemic. However, not all retail companies are yet well positioned for a recovery. The expected high earnings growth of Target Corporation (TGT) and Dillard's (DDS) make them solid picks now. But we think it’s wise to avoid weaker players, such as RealReal (REAL) and Express (EXPR), for now. Read on and we’ll explain.

Retail companies, particularly traditional brick-and-mortar retailers, were devastated in 2020 thanks to the COVID-19 pandemic. Government shutdown mandates, and the quick adoption of online shopping by consumers, were the key reasons why the retail space was severely impacted. However, the phased reopening of the global economy and strategic changes in the business models have helped some retailers recover over the past few months.

As increasing numbers of people are vaccinated for COVID-19, analysts expect a sharp recovery in the traditional retail business in the coming months. This, coupled with the latest recovery bill that is on the cusp of passage in the Senate, is boosting investors’ confidence in the retail space.

Consequently, retail stocks have started grabbing the spotlight. This is evidenced by the SPDR S&P Retail ETF’s (XRT) 24.4% gains so far this year compared to the S&P 500’s mere 1.7% returns. The retail sector’s momentum is expected to continue as the economy recovers steadily this year and consumer spending climbs back towards pre-pandemic levels.

The retail landscape has undergone rapid change, due primarily to supply chain disruptions and permanent store closures. However, several long-term winners and losers have emerged based on fundamentals and recent developments. While we believe Target Corporation (TGT) and Dillard's, Inc. (DDS) have fared well and could generate promising returns this year, we think the near-term prospects appear bleak for stocks including The RealReal, Inc. (REAL) and Express, Inc. (EXPR).

Click here to checkout our Retail Industry Report for 2021

Stocks to Buy:

Target Corporation (TGT)

TGT operates as a general merchandise retailer in the U.S.  and Canada, offering a selection of merchandise, including consumables, seasonal, home products and apparel. It sells its products through nearly 1,900 stores and  through its digital channel. The company operates five core merchandise categories, all of which  witnessed strong market-share gains last year.

In January, TGT expanded its decade-long partnership with Levi Strauss & Co. (LEVI), collaborating to feature a limited-edition collection of home and lifestyle items. The deal marked LEVI’s first “Home” partnership. TGT has also been investing in fulfillment centers, such as Drive Up and Shipt, which has bolstered its ability to make same-day deliveries. In addition,  the company is involved in opening small-scale stores in underserved areas to tap into an unsaturated market in both physical stores and e-commerce.

In the fourth quarter, ended January 31, 2020, TGT’s total revenue increased 16.4% year-over-year to $28.4 billion. Its comparable sales grew 20.5%, reflecting comparable traffic growth of 6.5% and a 13.1% increase in average ticket sales. Digital comparable sales surged 118%, accounting for two-thirds of its  overall comp growth. Same-day services (Order Pick Up, Drive Up and Shipt) grew 212%, led by more than 500% growth in Drive Up. Its  EPS came in at an all-time high of $2.73, rising 67.5% versus  its  year-ago value.

TGT  recently unveiled its strategic investment plans for the year, including plans to invest approximately $4 billion annually over the next several years to continue scaling capabilities across its retail platform. Building on years of sales growth and a record 2020 financial performance, TGT aims to accelerate new store openings and store remodels, enhance fulfillment services and strengthen its supply chain. The stock has gained a whopping 57.5% over the past year and should garner further  momentum; analysts expect TGT’s EPS to grow at an average rate of 10% per annum in the next five years.

TGT’s POWR Ratings reflect this promising outlook. TGT has an overall rating of A, which equates to Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors with the weighting of each optimized to improve overall performance.

It also has a B grade for Value, Sentiment and Quality. It is ranked #3 of 39 stocks in the A-rated Grocery/Big Box Retailers industry.

In total, we rate TGT on eight different levels. Click here to check additional POWR Ratings for TGT (Growth, Momentum and Stability).

Dillard's, Inc. (DDS)

DDS ranks among the nation’s largest fashion retailers. It  offers compelling apparel, cosmetics and home selections products. Its stores offer a broad selection of merchandise and feature products from both national and exclusive brand sources. DDS operates 257 Dillard’s locations and 28 clearance centers spanning 29 states, along with an internet store.

DDS  recently launched “Born on Fifth” for Antonio Melani, a new limited-edition capsule collection developed in collaboration with Atlanta-based tastemaker Emily Hertz. And on February 1,  DDS and New York-based designer duo, Michael and Alex Toccin, launched LDT, a new brand from TOCCIN NY.

In its fiscal fourth quarter (ended January 31, 2021), DDS’ net sales were $1.57 billion, versus  year-ago sales of $1.92 billion. Its retail gross margin improved 171 basis points. Its comparable store sales decreased approximately 17% in the fourth quarter following a 24% decrease in the third quarter. And its inventory decreased approximately 26%. However, its  EPS was $3.05, improving 11% versus its year-ago value of $2.75.

DDS has been diligent in its liquidity management since the onset of pandemic last year and has undertaken several aggressive measures to lower excess inventory and control expenses. In part as a result, the  stock has gained nearly 160% over the past six months. Its  management is optimistic about the company’s prospects because  “warmer weather and fresh fashions will motivate Americans to shop this spring.” In line with this outlook, analysts expect DDS’s current-year revenue and EPS to rise 25.9% and 185.6%, respectively.

DDS’s strong fundamentals are reflected in its POWR Ratings. DDS has an overall rating of B, which translates to Buy in our proprietary rating system. The stock also has a B grade  for  Value and Quality. In the 67-stock B-rated Fashion & Luxury Industry, it is ranked #8.

Beyond what we stated above, we have also given DDS grades for Growth, Momentum, Stability and Sentiment. Get all DDS’s ratings here.

Stocks to Avoid:

The RealReal, Inc. (REAL)

California-based REAL is the world’s largest online marketplace for consigned luxury goods. It offers various resale product categories, including women's, men's, kids', jewelry, and watches, as well as home and art products. The company serves more than 20 million members through its 13 retail locations and internet stores.

In the fourth quarter, REAL signed a lease for an authentication center in Phoenix, which the company plans to begin operating in the summer. The Phoenix facility will create more than 1,500 local, full-time jobs over the next five years, offering competitive pay, rewards and benefits. Furthermore, its  consignment of Gucci items grew 2.5 times faster than its overall consignment following the launch of its  partnership with Giucci in October, .

In the fourth quarter, ended December 31 REAL generated $84.6 million in revenue, decreasing 10% year-over-year. Its gross merchandise volume (GMV) came in at $301.2 million, representing a 1% year-over-year decline. Its consignment and service revenue also declined 16% versus  its year-ago value to $69.1 million. Also, the company reported a loss of $0.60 per share, widening its  year-ago loss of $0.25 per share.

Despite implementing strategic initiatives surrounding its neighborhood stores, vendor program and authentication center expansion, REAL’s average order value (AOV) over the  past year declined 6% compared to the prior year. In addition,  REAL is currently  facing litigation charges from Channel, Inc., which alleges that REAL falsely advertised and sold counterfeit handbags bearing its logo. REAL’s stock is down nearly 11% in the past month. Though analysts expect REAL’s revenue to rise 17.9% in the current quarter, its EPS is expected to decline 23.1%.

REAL’s POWR Ratings are consistent with this bleak outlook. The stock has an overall rating of F, which translates to Strong Sell in our proprietary ratings system. REAL also has an F grade for Value, and a D for Stability. It is ranked #67 in the Fashion & Luxury group.

In addition to the POWR Ratings grades I've just highlighted, you can see the REAL’s ratings for Growth, Momentum, Sentiment and Quality here.

Express, Inc. (EXPR)

EXPR is a mall-based, versatile, dual gender apparel and accessories brand that sells its products through its e-commerce website, mobile app, as well as franchisees Express locations in Latin America. As of October 31,  it operated 592 stores, comprising 378 retail stores and 214 factory outlet stores in the United States and Puerto Rico.

Last  September, EXPR received formal notice from the NYSE that the company was not in compliance with the NYSE's continued listing standards in that the average closing price of the company's common stock had been  less than $1.00 per share over a consecutive 30 trading-day period. The company regained compliance later in January this year, however.

EXPR is scheduled to discuss the financial results of its fiscal fourth quarter ended January 31,  on March 10, 2021. In its fiscal third quarter, JILL generated $322.1 million in revenues, declining 34% year-over-year. Its comparable retail sales, which include both Express stores and eCommerce, decreased 33% compared to the prior year, largely resulting from continued steep declines in wear-to-work and occasion-based categories. Moreover, EXPR reported a loss of $1.17 per share, compared to its  year-ago loss of $0.03.

As WallStreetBets short squeeze saga engrossed the Street last month, EXPR was one of the targets of Reddit traders. EXPR shares zoomed from around $1 per share to nearly $14 per share in just two weeks. Though the stock has since retreated to $2.50 levels, it is still up 175.8%  year-to-date.

The company has been burning cash since the onset of the pandemic as sales have plunged dramatically. Though the company has tackled its  liquidity crisis through additional financing, analysts do not expect a rapid recovery in EXPR’s financials in its current fiscal 2022. Wall Street analysts anticipate sales to remain below its pre-pandemic levels and, further, expect EXPR’s current year revenue and EPS to decline 40.4% and 3,769.2%, respectively.

It is no surprise that EXPR has an overall rating of D, which equates to Sell in our POWR Ratings system. EXPR  has an F  grade  for Stability and Sentiment, and D for Growth. It is ranked #66 in the Fashion & Luxury industry.

Click here to see the additional POWR Ratings for EXPR (Value, Momentum, and Quality).

The POWR Ratings are calculated by considering 118 different factors with the weighting of each optimized to improve overall performance.

Click here to checkout our Retail Industry Report for 2021

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TGT shares were trading at $167.74 per share on Friday morning, down $2.08 (-1.22%). Year-to-date, TGT has declined -4.64%, versus a 0.69% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies.


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