Many retailers have experienced a boon to their businesses thanks to a strong U.S. economy. But some companies are faring better than others and are positioning themselves for more growth in the coming years.
To help investors narrow down their search for some of the best retail stocks to buy right now, we asked three Motley Fool contributors for their top picks. They came back with Amazon.com (AMZN -0.82%), Walmart (WMT -0.39%), and Target Corporation (TGT 0.24%). Read on to find out why.
Retail and so much more
Jamal Carnette, CFA (Amazon): It's rare to find a company that has a runway for growth in three separate businesses, but there's nothing normal about Amazon. Although e-commerce may feel ubiquitous, only 10% of total U.S retail sales are online. As the largest e-commerce retailer in the country, Amazon will continue to benefit from a shift to the online channel.
However, Amazon's true profit center isn't in retailing but from its Amazon Web Services (AWS) cloud computing division. Because of its higher-margin profile, AWS allows Amazon to grow its bottom line and essentially subsidizes its lower-margin e-commerce business. Although Microsoft has recently emerged as a formidable challenger in the cloud, look for AWS to continue to grow at a rapid clip, as Gartner expects the overall industry to grow 58% over the next two years.
However, in-the-know investors are starting to get more excited about Amazon's digital marketing opportunity. Although its in the nascent phases, Amazon is taking on Alphabet's Google and Facebook by posting 130% year-over-year growth rates in its "other" division, which primarily consists of digital marketing revenue. As of last quarter, Amazon reported a run rate of nearly $10 billion in this presumably higher-margin business. Look for the combination of these three businesses to boost Amazon's stock price for years to come.
Adapting to an e-commerce world
Danny Vena (Walmart): Just when you think the world's largest retailer doesn't have any more tricks up its sleeve, it surprises. Many investors have given Walmart a pass in the burgeoning e-commerce era, as brick-and-mortar stores were thought to be falling completely out of favor. The company has been working feverishly to adapt, and in just three short years, Walmart has gone from something of an afterthought to a competitor by transforming itself into an omni-channel powerhouse.
Walmart's U.S. comparable-store sales increased by 4.5% in its most recent quarter -- the highest level of comp growth in more than 10 years. The gains came from both foot traffic, which increased 2.2%, and average ticket size, which grew 2.3%. Comparable sales also jumped at Sam's club, up 5% year over year, its strongest growth in six years, while international comps increased 4%.
The company's digital business is thriving as well, as year-over-year sales jumped 40%, and the retailer will likely reach its goal of 40% online sales growth for the year. Walmart is fueling this e-commerce growth by significantly increasing the number of stores that offer online grocery pickup, doubling the number of locations to about 2,100.
Walmart will also have rolled out grocery delivery to 800 stores by year end, which will put it within reach of 40% of the U.S. population. The addition of pickup towers is also driving growth and engagement, and Walmart will have towers in 700 stores by year end.
These initiatives have boosted the number of omnichannel customers that the company serves. These customers not only spend twice as much as those that only shop online but also spend more in stores after using multiple channels.
As the company continues to evolve, these measures will help Walmart's growth for years to come.
Bet on red
Chris Neiger (Target): If you're looking for a retail company that has taken a decidedly focused approach to both its in-store and online business, then Target is a no-brainer. After struggling to find its way just a few short years ago, Target has turned around its sales by homing in on its customers' needs.
You might recall Target's decision last year to spend $7 billion to update 1,000 stores, open up new, smaller locations in urban areas, and improve customers' in-store and online experiences. Based on Target's second-quarter results, that money has been very well spent. The company increased foot traffic to its stores by 6.4% (the highest growth since the company began keeping track in 2008), comparable sales were up 6.5% from the year-ago quarter (a 13-year high), and comparable digital sales were up 41%.
All of this growth led to the company bringing in $17.8 billion in sales in the most recent quarter, up 6.9% from the year-ago quarter, while earnings per share were up 22.7%, to $1.49 per share. Both outpaced analysts' expectations.
With Target's recent successes, it's no wonder that the company's share price has shot up 50% over the past year. But with the company's stock still trading at just 15 times the company's forward earnings -- not to mention its forward dividend yield of 2.9% -- Target still looks like an excellent buy for long-term retail investors.