The Best Retail Stocks for 2014

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To say that retailers felt the pinch in 2013 doesn't even begin to explain how difficult a year it was. Suburban stalwarts like Target and Wal-mart have failed to outperform the S&P 500, as consumers either save their cash or spend it on larger purchases, like home improvements and cars. The gridlock in Washington, changes in health care, and stagnation in wages haven't helped brighten the mood either. But a few retailers have set themselves up for success in 2014, focusing on providing unique products or services. These are the best retail stocks for 2014.

Costco continues its march
While traditional big box stores are going the way of all things flesh, Costco (NASDAQ: COST  ) has managed to avoid many of the biggest pitfalls. The company's focus on customer service has led to a steady rise in the number of memberships, with more than 72 million cardholders now signed up. For its fiscal year ended in September, the company increased comparable sales by 6%, boosted its operating margin, and generated a free cash flow of more than $1 billion.

Next year is going to be a similar story. By focusing on customer service, Costco has been able to keep its membership renewal rates high. Business customers in North America have a renewal rate of 94%, which is a testament to the discounting and bulk selling proposition that Costco provides.

In addition to growing that member base, Costco is also plans to add 30 locations next year, increasing its overall square footage by about 5%. The company operates the lion's share of its locations in the U.S. and Canada, but it has expanded to Asia, Australia, Europe, and Mexico.

In 2014, watch for Costco to start focusing on its online business a bit more. Right now, only 2.5% of total sales come from the online business, which gives the company plenty of room to grow. Memberships should continue to increase at a steady pace, providing the fuel to drive Costco's retail machine. Overall, 2014 is on track to be another solid year for this solid performer.

Home Depot benefits from housing
It's been a long time since anyone associated with the American housing market had good things to look forward to. Home prices have been dribbling along for years, but finally seemed to have picked up over the last 12 to 18 months. That's given Americans new reasons to fix up their old houses, and put existing homes in the hands of new owners, eager to turn them into dream homes. There's arguably no better place to supply that dream than at Home Depot (NYSE: HD  ) .

The stock started to see some love this year, as well, beating out the S&P 500 as sales rose at the retailer. Home Depot is finishing off the year strong, raising its yearly guidance as customers rush back into the store. That demand push has driven a solid increase in comparable store sales, and the company now expects the year to end with a 7% year-over-year increase.

That puts Home Depot in the driver's seat headed into 2014, and it has a route all planned out. The company is going to use its momentum to fuel a $5 billion stock repurchase, expand its operating margin, and increase earnings per share by more than 15%.

A projected 5% increase in revenue is the engine sitting under Home Depot's hood. As the housing market continues to grow in 2014, Home Depot should be well poised to reap the benefits. According to one recent study, the percentage of Americans planning to make a house purchase in the next six months is the highest it's been in over a decade. That's good news for Home Depot and its investors.

Amazon doesn't need drones to drum up good business
It wouldn't be much of a retailer list if Amazon (NASDAQ: AMZN  ) didn't make the cut. Jeff Bezos has been all over the news this year, buying The Washington Post and pushing the horrifying future of home delivery. Those side-projects have been just that, though -- side projects. The focus of Bezos' attention is still Amazon, and performance continues to impress.

This year has been no exception to Amazon's history of success. Revenue was up 22% for the first nine months of 2013, with a 10% to 25% increase expected in the fourth quarter. That growth has pushed the stock price up more than 50% this year, easily beating the S&P 500. Cash flow has also been strong, with Amazon generating almost $400 million in free cash flow over the past 12 months.

Next year is going to be another good one, as Amazon continues to grow its publishing and services businesses, while focusing on providing top of the line customer service. As evidence of its commitment to making its customers happy, the company recently announced that its "frustration-free" packaging -- which does away with hermetically sealed clamshell cases and plastic-coated steel-wire ties -- is now available on more than 200,000 items. Amazon's ability to play the long game has changed the way retailers work, and has made believers out of even the most skeptical investors.

The bottom line
As we box up the remnants of 2013, investors have a lot to look forward to. Next year may be good or bad, but these three companies have set themselves up for success in all kinds of weather. From the solid, steady return of Costco to the housing market champion Home Depot to the game-changing Amazon, these companies are doing retail right.

More winners in 2014
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