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2 Top Retail Stocks to Watch in July

By Anne Burdakin - Jul 9, 2020 at 9:35AM

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The right management is key in a retail recovery that delights investors.

Retail in the U.S. is reaching for recovery, and the best and most clever management teams will get there soonest. Two businesses whose managements have remained nimble through the coronavirus crisis are Sally Beauty Holdings (SBH -0.13%) and Gap (GPS 2.50%). The road to success has to begin with preparation, and I think both companies are prepared to come back with a roar.

Sally Beauty Holdings' e-commerce sales soar

Retail, in general, has been very beaten up during the COVID-19 health crisis. But if investors are willing to sort through the rubble, they may find opportunity waiting for them.

Sally Beauty Holdings could be one of those gems hiding in the retail sector mess. The company issued a better-than-expected business update on July 6, and it seems the company is on firmer ground than many others.

As of now, most of Sally Beauty's stores are open and experiencing strong demand. The company said June sales rose 9% year over year, and 33% over May. It also expects sales for the fiscal third quarter, ended in June, to be $705 million, exceeding the $657 million Wall Street has forecast. Full third-quarter results will be released later in July, according to the business update.

Sally Beauty's share price had struggled the past few years as the company adjusted to doing business digitally and updating internal technology. Business became even more challenging when COVID-19 struck. In the U.S., only 37% of Sally's retail outlets were open as of May 4, and only 10% were open in Europe. Shares were clobbered, and are trading now at about $13, down more than 28% in 2020.

The company sells in both the retail and professional markets, and the pandemic may have pushed Sally Beauty and its customers into the digital world a little faster than it would have moved otherwise. E-commerce growth in the third quarter leaped forward, retail e-commerce sales increasing 278% versus the year-ago quarter, and Sally U.S. and Canada (part of the professional supply side) increasing 555% in the same period.

Woman styling a man's hair in multiple braids at a salon.

Image source: Getty Images.

As the largest beauty products distributor in the U.S., Sally Beauty Holdings has plenty of opportunity now that technology updates and e-commerce efforts are starting to pay off. The company has an estimated $815 milliion in cash on hand, with an additional $200 million of undrawn capacity on its line of credit, putting it on solid ground financially to come back strong from the coronavirus crisis.

Sally Beauty may present a rare retail stock opportunity in the difficult year of 2020, with shares trading at just 7.2 times estimated fiscal year 2021 earnings. Investors should watch Sally Beauty Holdings carefully through July, as coronavirus restrictions ease and the beauty business increases sales. This company has the earmarks of a successful recovery, and accumulating a position on pullbacks will likely lead to profits.

Gap yells 'surprise' with Yeezy collaboration

It seems hard to believe that Gap has been selling clothes for more than 50 years. Founded in 1969 with the simple goal of providing shoppers with well-fitting jeans, the company has grown, and now owns a variety of brands including Old Navy, Athleta, and Banana Republic.

Unfortunately, Gap's fashion aesthetic has not matched shoppers' preferences at the same time that mall traffic has declined, resulting in a disappointing first-quarter 2021 earnings miss on June 4. In addition, Gap is having legal issues with mall owner Simon Property Group (SPG 1.56%) over rent payments due while stores were closed because of COVID-19. These factors and others have weighed on the stock price, which is down 32% year to date.

Then on June 26, it seemed like the sun came out, as Gap announced a new 10-year deal with Kanye West to design an apparel line called Yeezy Gap for men, women, and children. The company hopes the collaboration will result in about $1 billion in annual sales after five years, according to The New York Times. For context, Gap's brand brought in $4.6 billion in global revenue last year.

Kanye West is not a fashion neophyte, having designed a successful shoe line distributed by Adidas, and collaborated on design with high-end fashion houses like LVMH. Sales of Yeezy sneakers by Adidas were around $1.3 billion last year.

Gap's design partnership with Kanye West is part of new CEO Sonia Syngal's strategy to reinvigorate the retailer. The company will be able to offer exclusive designer products to customers, helping draw them back into stores and away from internet retailers, and will give Gap a much-needed clear brand identity. Kanye West's image and design sensibility bring the right level of excitement to the fashion retailer at the perfect time.

The stock is down 32% year to date. The price-to-sales ratio is 0.20, compared to the battered sector's average of 0.52, indicating the stock is undervalued at current prices.

The Kanye West partnership shows Gap is introducing freshness into its business. I think it's definitely a retail stock to watch in July as the story plays out and the new CEO takes the company in a new direction. Risk-tolerant investors with a long-term horizon may be well rewarded by buying in now if Syngal's turnaround plan succeeds. More-cautious investors might want to wait to see if Gap meets earnings estimates in the next couple of quarters, indicating a solid turn for the company.

Anne Burdakin has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Gap, Inc. Stock Quote
The Gap, Inc.
$10.64 (2.50%) $0.26
Sally Beauty Holdings, Inc. Stock Quote
Sally Beauty Holdings, Inc.
$15.19 (-0.13%) $0.02
Simon Property Group, Inc. Stock Quote
Simon Property Group, Inc.
$115.85 (1.56%) $1.78
adidas AG Stock Quote
adidas AG
$89.52 (1.00%) $0.89
LVMH Moët Hennessy - Louis Vuitton, Société Européenne Stock Quote
LVMH Moët Hennessy - Louis Vuitton, Société Européenne
$143.66 (0.96%) $1.37

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

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