Current State of Retail Industry and Analysis of Stocks to Invest into

Published: 2021-06-17 08:13:07
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Category: Corporate Governance, Finances

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The health of retail industry is an important economic indicator, as it is linked directly to consumers and their propensity to spend. The link between consumer spending and retail industry becomes more relevant as retail sales attract approximately 30% of total consumer spending in the US. There are multiple factors that supporting the uptrend in retail industry: strong economy, high consumer spending, very low unemployment rate, wages improving gradually, new tax cuts that enable retailers to invest more in their employees, in-store experience, technologies. Also, the upcoming holidays are promising to boost consumer spending across all the retail sectors.
According to the National Retail Federation, retail sales are expected to grow roughly 4% this year as merchants continue the momentum of a strong holiday season and benefit from tax cuts. Retailers reported $3.53 trillion in sales last year, a 3.9% bump from 2016, according to preliminary estimates from the US Census Bureau.Another point worth noting is that in order to compete in the age of Amazon, big box retailers such as Kroger, Walmart, Target, Costco are increasingly integrating new technologies including social commerce, e-commerce point of sale, face recognition techniques and virtual reality, all of which are likely and purposely to change consumers’ retail experience. Even though Amazon’s sales accounted for approximately 50-60% of online retail, the online retailing market is only 5% of total retail sales and has more room to growth in the next 10 to 15 years.For these reason, we recommend to invest into these retail stocks:

Target (TGT): 2Q-2018 earnings showed stronger-than-expected estimates for several reasons: traffic growth especially in digital, expansion of convenient fulfillment options, exclusive brand launches, store remodeling, lower effective tax rate. Target is performing way better than its peers: Walmart (WMT) and Costco (COST) on a YTD basis. Comparable digital sales growth 41%, since it’s investing a lot money into ecommerce and digital experience in order to compete with the Amazon – Whole Foods. Holiday season is coming, thus we can expect its stock price to increase after the holiday season.
Monster Beverage (MNST): 2Q-2018 earnings beat analysts’ expectation, but top line lagged expectations. Higher sales growth rates than Coca-Cola and PepsiCo. Strategic partnership with Coca-Cola that can benefit from Coca-Cola’s global distribution system, thus further Monster Beverage’s international presence. MNST increasingly expands its product lines to other regions such as Eastern European and Africa markets later this year and in 2019. Strong profitability ratio (gross margin, operating margin, net margin) are above industry average.
Walmart (WMT): Looking at the two relative valuation multipliers P/E ratio and PEG ratio (higher than industry average), one can interpret that WMT stock is slightly overvalued compared to the industry in general. However, when looking at its e-commerce sales growth rate which jumped 40% YoY and it’s expanding foothold in international market such as Canada, China, UK (top lines in China, Canada, UK increase 4.3%, 2.8%, 2.8% respectively), we can expect WMT to be a good investment in the future.

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