For weeks investors have speculated what the impact from the COVID-19 pandemic would be. But now the measurable results are starting to trickle in. One real economic effect is retail and food-service sales plummeted 8.7% in March, according to the U.S. Census Bureau.
That's the worst sales drop ever recorded.
Many retailers are currently closed. Image source: Getty Images.
We all know why
It's not surprising to see retail sales plunge by a record-setting percentage. Many retailers had no choice but to close their doors, as states implemented stay-home orders and physical-distancing guidelines. Consider New York City icon Macy's (M -0.19%). The company has over 800 locations across its brands, and all of them have been closed for a month.
Incidentally, clothing and clothing accessories stores like Macy's were the hardest hit in March -- recording a more than 50% drop in sales.
And the coronavirus isn't only affecting brick-and-mortar retailers. Stitch Fix (SFIX 1.86%) is a digital operation, but its products ship from physical distribution centers. The company had to withdraw its 2020 guidance in part because it closed two out of four distribution centers to comply with stay-home orders in California and Pennsylvania.
Further complicating the problem of closed stores, unemployment is rising. Data from the U.S. Department of Labor on Thursday showed initial unemployment claims of 5.2 million -- bringing the four-week total to about 24 million. That's around 15% of the American workforce.
With high unemployment like this, consumer-discretionary retail hurts the most for obvious reasons. Without income, consumers push off frivolous purchases and focus on the essentials. The data bears this out. The same report from the Census Bureau shows that grocery retail surged 26.9% in March. This is partly due hoarding behavior as shoppers prepared for the uncertainty of quarantines. But it's also attributable to people choosing to cook at home rather than spend the extra money to order out.
Should you buy retail and food-service stocks?
Anecdotally, I've heard friends and family (mostly non-investors) saying that now is the time to buy. And I agree, but with a couple of caveats. First, now is a good time to buy because it's always a good time to buy. What I mean is, I don't believe you can time the market; no one knows where the top or bottom is here. The only way to counteract this near-term confusion is to consistently bet on the market in the long-term.
But second, and just as important, you should be choosy in buying stocks -- now and always. I'm not looking to indiscriminately buy shares of any retail and food-service stock that happens to be down. I'm looking for strong companies that can deliver sustainable results for years to come.
In the restaurant business, I believe Starbucks (SBUX 0.91%) is one such buying opportunity. An empire the size of Starbucks with more than 31,000 locations isn't typically associated with growth. But the coffee giant grew revenue 10% in 2019 while adding 1,900 new locations. And these new locations didn't steal sales from existing stores, as comparable sales also grew 5% for the year. This suggests the brand isn't oversaturated and has room for further expansion.
In response to COVID-19, Starbucks had to reduce operating hours, temporarily close stores, and shift to a to-go model in the U.S., China, and around the world. As much as this has decimated March sales, the company still expects to be profitable during this time. That financial stability will allow the company to emerge in a position of strength when the coronavirus ends.
Starbuck's dividend yield is currently north of 2%, which is rare for this stock. And Starbucks doesn't expect to reduce future dividend payments. With shares still down more than 25% from 52-week highs, now could be a great time to pick up shares.
Additionally, Lowe's (LOW 0.44%) could be a savvy purchase right now with share trading at 25% discount to previous highs. The Census Bureau data showed that building material sales were up 1% in March, and Lowe's seems to be validating that upside number. Unlike many other retailers, Lowe's hasn't announced any furloughs or layoffs. Apparently, sales are good enough to warrant keeping its employees and even granting them bonuses.
With Lowe's, I'm excited that stores have remained open, sales have held up, and it's positioned to capture its growth opportunities when the pandemic is over. It's a long-term market beater and a top Dividend King after raising its dividend for 57 consecutive years. And that dividend currently yields over 2%, which is also on the high end of its historical range.
