The coronavirus outbreak has weighed on most industries over the past few months, but retailers were hit particularly hard. Temporary store shutdowns meant less revenue, even for those with a strong online presence. Apparel retailers may have had it the worst as shoppers on lockdown focused on buying essentials rather than discretionary items.
As stores begin to reopen and Americans emerge from lockdowns, we can start thinking about which retailers have the best prospects moving forward.
Image source: Getty Images.
If you have a long-term investment perspective, here are three retail stocks to buy this year:
TJX Companies
Everyone loves a bargain, right? Well that's what TJX Companies (TJX -0.10%), owner of TJ Maxx and Marshalls, is all about. Like its peers, TJX suffered from store closures in the earlier stage of the coronavirus outbreak. The company reported a 52% drop in fiscal 2021 first-quarter sales as stores were closed for half of the period. But I'm confident in the off-price retailer's future revenue potential.
The off-price market has continued to grow while overall apparel sales have faltered. Total apparel sales fell 3% in the 12 months ending in November, but off-price rose 3%, according to research by The NPD Group. In a separate report, NPD speaks of the "treasure hunt" aspect of shopping at off-price retailers as one of the reasons for their popularity, as well as prices that are often 60% lower than in traditional shops. Record weekly unemployment claims this spring mean consumers likely will be looking for bargains in the coming months -- sending them straight to TJ Maxx or Marshalls.
TJX is able to pass savings on to shoppers because it buys inventory at the lowest possible price. These days, another boost for TJX may come from a flood of inventory as suffering retailers shed stock and others go out of business. And an abundance of great brands at rock-bottom prices in the company's stores will keep customers coming back.
Annual revenue has been climbing at TJX for more than 20 years, and as stores reopened in May, the company said it saw "very strong initial sales" across markets.
The RealReal
There are two elements that make me particularly optimistic about The RealReal (REAL -2.13%) amid a weakened economy: The business is primarily online, and most purchases are made by returning customers. The online luxury consignment shop doesn't have to worry about high rent or shoppers' reticence about coming into contact with others. And in a difficult retail climate, having a strong client base to rely on is an advantage.
Stay-at-home orders put pressure on The RealReal, limiting warehouse operations during part of the first quarter. Gross merchandise volume (GMV) fell as much as 45% from mid-March to mid-April but has since started to improve.
Though the company reported a quarterly loss, the earnings report wasn't disastrous. For the quarter, total revenue rose 11% year over year, and GMV from repeat buyers totaled more than 84%. That's up from 82% in the year-earlier period. The RealReal said in the earnings call that demand is at "pre-COVID levels."
Looking ahead, The RealReal may benefit from growth in online shopping as well as customers' interest in sustainability. About 50% of consignors say they consign for environmental reasons, and more than 30% of The RealReal shoppers choose The RealReal over sellers of "fast fashion" -- cheap clothing that is often discarded from season to season.
American Eagle Outfitters
I've been hesitant about mall-based stores for a while. As shoppers do more shopping online or in neighborhood strip plazas, mall stores have suffered. That's a problem for American Eagle Outfitters (AEO -0.28%), but recent share declines and a solid track record of revenue growth at its Aerie brand make me more optimistic about this retail stock than I was a few months ago -- even considering the mall's difficulties. The shares are trading 50% lower than last year's high.
The fact that American Eagle swung to a loss during the first quarter is no surprise considering the temporary store closures and related costs during the coronavirus outbreak. The key figures to look at for a view of what might be ahead are those related to e-commerce.
American Eagle said during the June 3 report that overall digital demand (measured by ordered sales, the company says) rose 33%. And its high-growth brand Aerie saw digital demand surge 75%. That's impressive in a context favoring purchases of food and cleaning products over fashion.
And speaking of Aerie, the brand has been on a roll for quite a while. In the previous quarter, Aerie's same-store sales climbed 26% for the 21st straight quarter of double-digit sales growth. And as L Brands' (BBWI -2.08%) closes about 250 Victoria's Secret stores in North America as part of restructuring, Aerie, with its comfortable and reasonably priced intimate and leisure wear, may gain even more market share.
