There's been a lot of doom and gloom in the retail industry, and with good reason. The emergence of Amazon.com and the proliferation of e-commerce have created a tough atmosphere for traditional retail. Vacancies at U.S. shopping malls are at their highest level in six years, as more and more brick-and-mortar retailers make the transition to the digital era.
However, there are traditional retailers that have not only succeeded in embracing online selling, but that have created omnichannel capabilities that are drawing shoppers back to physical stores. There are others whose unique value proposition has made them a destination, sidestepping the e-commerce issue.
Let's look at three retail stocks that have beaten the odds in this challenging environment and are positioning themselves for future success: Best Buy (NYSE:BBY), Walmart (NYSE:WMT), and Five Below (NASDAQ:FIVE).
Back from the brink
It's hard to believe the turnaround that's taken place at Best Buy over the past several years. The company was left for dead, with the stock dropping below $12 per share in late 2012. Since then, the stock has come roaring back, recently achieving all-time highs near $80 per share.
The beginning of the company's turnaround coincided with the arrival of CEO Hubert Joly, who joined Best Buy in August 2012. Joly used a multipronged approach to revive the ailing electronics retailer, making several bold moves in the process. Best Buy invested heavily in improving its website, matching prices from online competitors, and training its employees to encourage better interaction with customers. The company also sought to blur the line between physical and online retail, promoting buying online and picking up items in stores.
That overall strategy has been a smashing success. In its most recent quarter, Best Buy's revenue increased 6.8% year over year, beating its own forecasts and those of analysts, while it's comparable-store sales jumped 7.1%, on top of 9% growth achieved in the previous quarter. This impressive top line and same-store sales growth drove profits up by 20% compared with the prior-year quarter.
Best Buy is focusing on connected-home products and home visits by its Geek Squad technicians to drive future growth, while continuing to blur the line between sales channels. There's no reason to believe its success won't continue.
Meeting the challenge
No company epitomizes the challenges faced by traditional merchants better than Walmart. Its relentless focus on value and low prices help make it the world's largest retailer, but the emergence of e-commerce threatened to undermine that dominance.
After struggling for years with its own web-based sales, the company jump-started its online sales aspirations with the purchase of start-up Jet.com for $3.3 billion in August 2016. The company also acquired the talents of Jet's founder, Marc Lore, who brought a start-up mentality to the storied retailer, while taking the reins of its e-commerce operations.
Walmart made a flurry of other purchases in rapid succession, including outdoor retail purveyor Moosejaw, men's clothier Bonobos, and women's fashion outlet Modcloth, among others. Walmart's latest move was its biggest yet, acquiring a controlling stake in India's largest online retailer, Flipkart.
Walmart has made a number of other moves to maintain its relevance in the changing retail environment. The company has adopted two-day shipping and is encouraging customers to order online and schedule an in-store pickup. Walmart is also targeting millennial shoppers, a large buying demographic that has typically avoided the merchant.
These moves appear to be taking hold. In its most recent quarter, Walmart grew revenue by 4.4% year over year, exceeding expectations, while same-store sales increased 2.1% compared to the prior-year period. E-commerce sales grew 33% over the year-ago quarter, and Walmart expects its full-year online sales to jump 40% year over year.
Cashing in on fads
While many traditional retailers have struggled with changes in consumer behavior and the e-commerce trend, it's hard to categorize Five Below as traditional. The discount retailer caters directly to the teen and tween demographic, with everything in its stores selling for $5 or less.
"Five Below carries an ever-evolving and exciting assortment of cellphone cases and chargers, remote control cars, yoga pants, graphic tees, nail polish, footballs and soccer balls, tons of candy and seasonal must-haves for Easter, Halloween, Christmas, and more," according to its website.
In its most recent quarter, Five Below posted net sales that jumped 27% year over year, while net income soared 160%. Comparable-store sales climbed 3.2%. The company's current base stands at 658 sites in 32 states, but Five Below plans to boost its store count by 125 locations this year and eventually grow to 2,500 locations nationwide, providing plenty of opportunity for growth.
Five Below's unique positioning as a store where teens and pre-teens can spend their allowance has largely bypassed the e-commerce challenges experienced by other retail stores, but that hasn't stopped the company from adding an online sales channel to boost its growth. The company's relentless focus on this niche market should keep it growing for years to come.
The story is just beginning
Worldwide e-commerce sales grew 25% in 2017, driven by a 59% increase in mobile buying. Online sales accounted for 10.2% of total retail, but their portion is expected to soar to 17.5% of sales by 2021. Brick-and-mortar retailers will need to evolve in order to survive this ever-growing trend toward online sales. These three companies have each taken a different approach to this conundrum and have shown that it's possible to adapt to this new retail reality.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Five Below. The Motley Fool has a disclosure policy.