Retail stocks have been under fire lately as the trend toward online shopping continues to gain steam. That doesn't mean that the entire retail industry is off limits for investors, however. Some companies are more immune to the changing dynamic wrought by e-commerce, while others have cracked the code and found a way to blend the physical and digital shopping experience to keep customers coming back.
To identify retail stocks that are ripe for the picking, we asked three Fool.com contributors to choose companies that will still be able to thrive in this changing retail paradigm. Read on to find out why they chose Best Buy (NYSE:BBY), The Michaels Companies (NASDAQ:MIK), and Kroger (NYSE:KR).
Surviving the retail apocalypse
Danny Vena (Best Buy): It wasn't all that long ago that Best Buy was among the first businesses vulnerable to the growing dominance of e-commerce. The company was suffering from "showrooming" -- the practice of researching products online, checking them out in a physical store, before ultimately buying them elsewhere, typically from a less expensive online retailer.
Best Buy turned the practice on its head, offering incentives for customers to actually buy, rather than just window shop there. The company employed a multi-pronged strategy under CEO Hubert Joly who arrived in late 2012. By matching competitor prices, improving the functionality of its website, and training employees to develop better customer relationships, the company was able entice customers to actually make those purchases. Best Buy was also successful at blurring the line between online and brick-and-mortar retail, allowing customers to order on its website and pick up items at the store.
The company is back from the brink, with the stock returning more than four-fold under Joly's tenure. These results aren't some distant memory either. In an environment that has proved difficult for many retailers, Best Buy was able to increase its comparable store sales by 7.1% in its most recent quarter, on top of a 9% increase sequentially. Revenue increased by 6.8% year over year, and adjusted earnings per share went up 25% compared to the prior-year quarter.
Best Buy may not seem like a screaming bargain at first glance, with a trailing price-to-earnings ratio of 22, but looks can be deceiving -- as this metric includes a charge related to recent U.S. tax reform. Adjusted for that one-time event produces a much more appetizing P/E of 16. The company also recently increased its dividend by 32% to $0.45 per quarter, yielding 2.4%. Even better, the company is only using 32% of its profits to support the payout, so there is plenty of room for future growth.
Investors looking for the top retail stocks to buy now need look no further than Best Buy.
Michaels shares really shouldn't be on fire sale today (but they are)
Anders Bylund (The Michaels Companies): The arts and crafts materials retailer holds a leading position in a retail segment with unique resistance to e-commerce attacks, because its customers like to see and touch their chosen objects in person rather than rely on a dry description and a digital image. But investors seem not to have noticed this significant business advantage. The slightest challenge has been enough to send Michaels' stock into a tailspin, which is why these shares look like a terrific buy right now.
Michaels edged past analyst estimates in June's first-quarter report, but Mr. Market didn't care for that rosy detail. Instead, share prices plunged as much as 19% lower on the next trading day alone due to modest guidance for the next quarter.
Although Michaels' share price has bounced back by 13% since that bargain-bin bottom, the stock remains incredibly affordable at just 10.5 times trailing earnings, 8.3 times forward estimates, and 8.8 times annual sales.
Keep in mind that the second-quarter forecast came in a bit low because Michaels is remodeling the majority of its stores in preparation for a stronger third-quarter holiday season. There's nothing like putting up a refreshed store design right before the December festivities start, especially in this experience-focused retailing sector.
Management may have offered a soft set of pre-holiday targets but its full-year projections didn't budge a penny lower. At the end of June, the company accelerated its share buyback program. Those are two solid pieces of evidence showing that Michaels' leadership sees value in the current direction.
And so should investors. The buying window for Michaels shares is wide open right now.
Groceries go digital
Nicholas Rossolillo (Kroger): America's largest grocery chain has taken to the internet. While online retail headlines have focused on the matchup between Amazon and Walmart, Kroger has been getting serious about incorporating digital sales tools into its strategy, too. The Restock Kroger plan announced last fall plans to reinvest profits back into the business to drive long-term growth around new initiatives.
Less than a year in, Restock has already changed the company and its family of regional food chains. Its sluggish convenience store segment was sold off back in the spring and replaced with the acquisition of meal-kit company Home Chef; the number of stores enabled with digital ordering and pickup scheduling technology Click List have grown to over 1,000; grocery brand advertising was launched on Kroger's app to generate new ad revenue; and relationships with companies like Instacart and Nuro have been expanded to promote growth in grocery delivery services.
Kroger's digital business grew 90% in 2017 and 66% in the first quarter of 2018. Comparable sales across its stores and digital initiatives increased 1.9% year over year to start the year, and the plan is that online ordering capabilities will roll out to an additional 500 locations this year. Total sales and adjusted earnings were up 3.4% and 25.9%, respectively, in the first quarter as a result.
Kroger is reaping the benefits of its business modernization, but because of uncertainty from competition in the grocery industry, the stock trades at a lowly 7.1 trailing-12-month price to earnings. As a bonus, the stock yields a 2% dividend after management doled out a 12% pay raise last quarter. The grocery business isn't the most exciting of industries, but Kroger looks too cheap to ignore as it makes inroads into the world of digital retail.