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3 Top Retailers to Buy in July

By Demitri Kalogeropoulos – Jul 1, 2020 at 7:14AM

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Here are a few standout winners in this troubled industry.

Most retailers just went through their worst operating stretch in decades, and there's every reason to expect further pain ahead in the second half of 2020. Economic growth might be weak, with a soft economy made worse by additional outbreaks of COVID-19.

Yet stellar businesses tend to outperform through pressures like these. So, let's take a look at a few retailers that stood above their rivals through the first phase of the pandemic and seem set to maintain that positive momentum.

A man and a woman paint a room blue together

Image source: Getty Images.

1. Lululemon

The recent earnings report by industry leader Nike (NKE -12.81%) helped illustrate just how strong lululemon athletica's (LULU -6.88%) business is today. The apparel specialist only endured a 17% sales decline through early May, while Nike's revenue dove by 38% in its comparable fiscal fourth quarter.

Both companies enjoyed an e-commerce boost as shoppers shifted demand toward the digital channel. But, unlike Nike, Lululemon isn't exposed to physical retailing partners, who pulled back their purchasing by 50% at the height of the pandemic. This setup helped it keep better control over its inventory and likely avoided the type of writedown charge that powered Nike's $800 million Q4 loss.

Lululemon isn't completely past the danger zone for inventory charges, but the chain sells a higher proportion of nonseasonal products, and so the risk isn't as high as it is with Nike and other peers.

As for the next few quarters, look for gross profit margin to get right back to its multiyear track record of growth as soon as its customers can return to more normal spending habits.

NKE Gross Profit Margin Chart

NKE Gross Profit Margin data by YCharts.

2. Sherwin-Williams

Sherwin-Williams (SHW -1.49%) is set to announce its fiscal second-quarter results on July 28, but investors already have some good reasons to be optimistic about this report. The global paint giant recently raised its short-term outlook while pointing to a broad-based acceleration in demand for home improvement supplies. Sure, parts of its business -- like the automotive paint group -- are in decline. But Sherwin-Williams is seeing "unprecedented demand," executives said, in the consumer segment that caters to do-it-yourself home upgrade fans.

Its sales are still likely to fall in the U.S. market this quarter, as many locations closed during March and April. Investors interested in continuous growth might prefer Home Depot for its attractive market share and cash efficiency. But Sherwin-Williams has the big-box retailer beat in categories like profitability and dividend growth, while still enjoying exposure to the global home improvement industry.

3. Kroger

Up until late 2017, Kroger (KR -2.08%) had been on an almost unbroken 10-year streak of stealing market share from its main rival, Walmart. The supermarket chain finally got back to its old winning ways in the latest quarter, with sales soaring by 19% at the start of fiscal 2020.

That was enough to trounce Walmart's 10% increase, although those numbers aren't directly comparable since Kroger's Q1 report runs through May while Walmart's ends in late April. Still, it's likely that the grocery giant won share against its peers in recent months.

What is less clear is whether Kroger can maintain that momentum, or if it will go right back to the sub-3% sales growth that investors have seen in the last few pre-COVID-19 quarters.

There are two reasons to buy into the more optimistic scenario.

First, Kroger's in-store brands are surging in popularity, with a 21% spike across franchises like Simple Truth last quarter. That success implies rising customer loyalty for its exclusive products.

Second, Kroger's cash position is strong and improving. Its debt ratio just dropped below management's long-term goal, in fact. Normally, that success would suggest Kroger is about to ramp up direct cash returns like dividends or stock buybacks -- or maybe make another large acquisition like the Harris Teeter buyout.

The cash is even more valuable for the flexibility it delivers, which should let the consumer chain take advantage of growth opportunities heading into the second half of 2020.

Demitrios Kalogeropoulos owns shares of Home Depot, Nike, and Sherwin-Williams. The Motley Fool owns shares of and recommends Home Depot, Lululemon Athletica, and Nike. The Motley Fool recommends Sherwin-Williams and recommends the following options: long January 2021 $120 calls on Home Depot and short January 2021 $210 calls on Home Depot. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Lululemon Athletica Inc. Stock Quote
Lululemon Athletica Inc.
$279.56 (-6.88%) $-20.66
The Kroger Co. Stock Quote
The Kroger Co.
$43.75 (-2.08%) $0.93
The Sherwin-Williams Company Stock Quote
The Sherwin-Williams Company
$204.75 (-1.49%) $-3.09
NIKE, Inc. Stock Quote
NIKE, Inc.
$83.12 (-12.81%) $-12.21

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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