This past year was a tough one for most companies, but it was downright brutal for many retailers. COVID-19 lockdowns helped set the stage for what Coresight Research believes could be as many as 25,000 U.S. store closures in 2020, nearly tripling 2019's tally. The fact that consumers have trained themselves to do even more of their shopping online suggests 2021 will be no picnic for retailers either.
There's a handful of retail names, however, that may come out of the pandemic in even stronger shape than when they entered it, after better meshing their online and in-store operations. Here's a rundown of the coming year's best retail stock picks, and a look at how they're defying the odds.
1. Lowe's
For years, home improvement retailer Lowe's (LOW +1.65%) has struggled to keep pace with its much bigger rival Home Depot. There's a chance, however, the smaller name has already become the better investment.
Image source: Getty Images.
Lowe's so-called "Total Home" strategy (unveiled in early December) is an encouraging development that sets the stage for this possibility. The initiative aims to "enhance customer engagement and grow market share" as well as other initiatives, according to the company, with a top-down overhaul of everything Lowe's does including its omnichannel efforts. It's cliche as far as corporate strategies go, but that doesn't mean it won't be effective.
The thing is, we may already be seeing glimpses of Lowe's new edge on its chief competitor. For the quarter ending in October, Lowe's same-store sales growth of 30% in the U.S. prompted a 40% year-over-year improvement in operating income. Home Depot's same-store sales were only up 25% for the same quarter, prompting a more modest 23% increase in operating profits.
One quarter's worth of outperformance doesn't make a trend, but it does suggest Lowe's is starting to figure a few things out.
2. Kohl's
Department stores have been the proverbial poster children for what's come to be called the retail apocalypse. That's a somewhat misleading association, though. Department stores located at malls and the malls themselves are at the epicenter of the retail headwind. Off-mall shopping strip malls are doing alright because they cater to how and where consumers live now.
Enter Kohl's (KSS +1.06%). Of the company's 1,100+ stores, more than 95% of them are off-mall locations. These neighborhood-oriented units draw their own crowds without relying on a mall's foot traffic to supply shoppers.
The company's gotten pretty good at drawing traffic too, but it's getting savvier all the time. Last year it began accepting in-store returns for goods purchased from online retail giant Amazon.com (AMZN +0.61%). This year it's begun experiments in sharing square footage with Amazon's grocery store brand called Fresh. Perhaps best of all, in early December Kohl's announced it would be adding Sephora brand beauty shops to more than 800 stores by 2023.
It's difficult to determine exactly how much additional foot traffic these deals will drive. It's also difficult to say that these and similar partnerships won't boost shopper counts in the foreseeable future.
3. Tractor Supply
Tractor Supply (TSCO +3.05%) finds itself at the convergence of two semi-related trends.
The first of these trends is consumers' ever-increasing interest in self-reliance. Shortages of some foods stemming from panic-buying in early 2020 underscored and accelerated this trend, but didn't start it. Home gardens and off-grid living have been increasingly popular lifestyles for years now. This shift isn't likely to stop anytime soon, either.
The other trend working in Tractor Supply's favor is a migration out of the U.S.'s most densely packed metropolitan areas and into its more rural settings. Amid this search for a more self-reliant lifestyle, for instance, New York City lost roughly 300,000 residents this past year. Not all of them are moving to decidedly rural areas. But many of them are moving to decidedly less urban areas like upstate New York, where they can enjoy a little more room for a little less money.
Selling goods ranging from seeds to farming apparel to solar panels, an outfit like Tractor Supply can easily help newcomers adapt to living on (and off) their land.
4. Big Lots
When investors think of dollar stores, most think of Dollar General or Dollar Tree, which also owns the Family Dollar brand. Dollar General operates more than 17,000 locations peppered across 46 states, while Dollar Tree's footprint is more than 15,000 stores strong between its two venues. Big Lots (BIG +0.00%) is relatively small potatoes by comparison, with only 1,400 stores in the company's network.
Don't let its smaller size fool you, though. It's the biggest opportunity of the bunch. Last quarter's same-store sales growth of nearly 18% easily outpaced the same growth metrics for Dollar Tree and Dollar General.
It wasn't a fluke, either. It's a reflection of Big Lots' savvy approach to running its stores. See, the discounter may be one of the smallest names in the business, but it doesn't think like one. It's developed a profile of its most important customer, and every decision it makes is ultimately meant to satisfy this 30-something woman named Jennifer, who's busy, has a mobile phone in her hand that's connected to social media sites, is budget-minded, but still likes to have a nice-looking home. Big Lots was also the first (and is still the only) discounter to offer true curbside pickup of online orders, and in June announced a partnership with PICKUP that offers same-day delivery of online orders placed with local stores.
5. Bed Bath & Beyond
Finally, add home goods retailer Bed Bath & Beyond (BBBY +0.00%) to your shortlist of retail stock picks for the coming 2021.
It's a name most investors had given up on. It did little to stave off Amazon's penetration of the market, and then after finally ridding itself of CEO Steven Temares in May of last year, took too long to hire his replacement. Former Target executive Mark Tritton didn't take the helm until October of last year, and he inherited a struggling company that was on the verge of facing a catastrophic pandemic. It would have been easy to write off Bed Bath & Beyond for good.
That would have been a mistake. Tritton appears to be turning the company around despite the challenging environment. For the first time since 2016, same-store sales improved during the quarter ending in August, up 6% year over year. This growth was largely driven by a new-and-improved e-commerce platform that prompted 89% growth in revenue.
It's just a taste of the changes Tritton is putting in place. The retailer's product assortment, in-store tech, and omnichannel promotional approach are all -- finally -- being revamped at the same time the chain is streamlining its business. The pivot may already have been made.
