Is March's Retail Report Telling You to Buy or Avoid These 4 Stocks?

Home Depot, Rite Aid, Costco, and Best Buy are all large, well-known retailers. But according to the March retail figures, only three are worthy of investors' attention.

Apr 16, 2014 at 8:45AM

March's retail sales were a pleasant surprise; this coming after months of retailers blaming poor performance on Mother Nature. Thus, some believe that pent-up demand could lead to a strong quarter in retail. However, March's retail numbers insinuate that this performance might not be occurring in every market. Therefore, which of these companies might perform best: Home Depot (NYSE:HD), Costco Wholesale (NASDAQ:COST), Rite Aid (NYSE:RAD), or Best Buy (NYSE:BBY)?

A glimpse at the report
The U.S. retail and food services sales report is closely watched as an indication of what consumers are buying. In previous months, the numbers haven't been too bullish, but a 1.1% increase in March over February is seen as moving in the right direction.

In addition, March saw a 3.8% increase in retail sales over last year, which now brings total retail growth for the first quarter to 2.5% year over year. Granted, much of that growth comes from motor-vehicle sales and e-commerce, which grew 5.6% and 6.6%, respectively. However, in key industries within retail, can we identify key strengths and weaknesses?

Pharmacies are growing, and not just drug sales
If we exclude auto and e-commerce, retail sales for the year had been flat prior to March. Yet one strength has been in health and personal stores, or pharmacies, which have grown 4.1% this year. As a result, their 0.3% March advance over February may not seem impressive, but it's being compared to periods where the segment saw growth despite losses for others.

Therefore, Rite Aid may present a good investment opportunity. Sure, it is not the largest in the space. But with $26.5 billion in guided revenue for 2014, it's not small, either. This is a company that continues to increase its margins. And with 2.2% revenue growth in its fiscal fourth quarter, it's growing faster than at any point in the last five years. As you can see, Rite Aid's growth is not all company-related; it's a macro effect, but one that could drive this stock even higher.

Building materials, gardening, and clear strength
In the first quarter of this year, building-materials and garden-equipment retail rose 3.6% and an impressive 1.8%, respectively, in March over February. Importantly, this tracks the performance of companies like Home Depot excluding contractor revenue from the sale of lumber, concrete, etc.

Thus, Home Depot is likely performing substantially better than the sales report implies from a comparable-store sales measure. If so, strong comps typically insinuate higher margins; and given Home Depot's 7.5% stock loss this year, this performance might imply a good investment opportunity.

Big retail gaining momentum
Next, there is the large segment called general merchandise, and this accounts for all the major retailers such as Costco. Sales in the first two months of 2014 haven't been too impressive. But March's performance over February suggests that it's gaining momentum and that consumers are starting to buy. Particularly, this segment grew 1.9% in March over February, giving it flat year-over-year performance for the first quarter.

In an environment with such growth, Costco is a company that could thrive. It recently announced March sales figures, showing overall revenue growth of 8% and a 5% increase at existing stores. Like Home Depot, Costco has seen mid-single-digit stock declines this year, meaning it could present an investment opportunity.

Electronics fail to show any positives
Lastly, electronics and appliance stores is a segment that's showing no signs of strength or improvement whatsoever. In a month in which overall retail was higher by a percentage point, electronics stores saw a 1.6% decline, by far the worst performance of the large retail categories. Furthermore, March's sales represent a 0.7% decline year over year; but if we look at the first quarter, sales are down 1.5%.

With that said, how can you feel confident with investing in Best Buy, the U.S.' largest electronics retailer? The company is currently expected to post flat year-over-year sales this year. But with Best Buy closing stores and comparable sales continuing to fall, it's hard to fathom a scenario in which it meets these expectations. Essentially, this is the worst place in retail to invest, one that's showing no signs of improvement.

Final thoughts
As investors, we can learn a lot from retail reports, such as where the strength is located, where momentum is being created, and which segments we'd be wise to avoid.

In Rite Aid and Home Depot we have two companies with clear improvements, while Costco is likely the best choice if big retail continues to see momentum. However, there are just no good reasons based on both the performance in March and in the first quarter to be bullish on Best Buy. All in all, these retail reports are important, and can help guide you when looking for where to invest.

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Brian Nichols owns shares of Rite Aid. The Motley Fool recommends Costco Wholesale, CVS Caremark, and Home Depot. The Motley Fool owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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