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3 Retail Stocks to Buy Before the Next Market Crash

By Adria Cimino - Feb 16, 2021 at 9:31AM

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Take a look at their track records -- and what will drive future growth.

Retailers were among the companies that suffered most during the last market crash, as the coronavirus pandemic kept shoppers at home and focused on the essentials. What's more, stores selling non-essential items were forced to temporarily close due to the crisis. This was likely an isolated event, and future market crashes -- unless linked to a health crisis -- probably won't punish retailers so severely.

Still, it's useful to look at which retailers best navigated the difficult period following the March 2020 crash because it's a sign of strength. If a company also has a track record of earnings growth and you can see revenue growth drivers ahead, it's probably one you'll want to buy before the next crash.

When it comes to strong performance, even in a market downturn, here are three of my favorite retail stocks.

An investor studies a stock market chart on a tablet.

Image source: Getty Images.

1. Target

Target (TGT 2.46%) had been growing its online platform and contactless pickup options for years, and in 2020 these services truly bloomed. Year-over-year digital sales climbed in the triple-digit percentages each quarter, and pickup and drive-up services soared 217% in the most recent quarter. At first, shoppers rushed to Target for essentials. But in the following months, shopping lists began to return to normal. That meant more purchases of higher-margin items like clothing and accessories.

A McKinsey & Company report predicts online shopping growth will continue beyond the crisis, which is good news for Target. But Target's in-store traffic has also picked up, so the company will benefit from both.

The retailer's owned brands are a significant growth driver, too -- even in times of crisis such as now. Target's year-old All in Motion activewear line just became the company's 10th billion-dollar brand. And Target continues to innovate: The retailer last month launched its first seamless clothing collection for optimal comfort. This innovation allows Target to compete with premium activewear brands.

Target's net income and revenue have been climbing for the past four years. And in 2019, annual digital sales rose more than 25% for the sixth straight year.

2. Lululemon Athletica

lululemon athletica (LULU 2.46%) is another example of digital strength. The maker of yoga-inspired clothing posted double-digit or triple-digit percentage gains in online sales throughout the coronavirus crisis. This was particularly important early on when stores were temporarily closed. And it showed consumers' loyalty to the brand at a time when they weren't necessarily focused on non-essential purchases.

What's most encouraging now is Lululemon's pace of recovery. In the third quarter ended Nov. 1, Lululemon reported year-over-year increases in overall revenue, operating income, and earnings per share.

LULU Operating Income (Quarterly) Chart

LULU Operating Income (Quarterly) data by YCharts

This adds to a solid track record. Lululemon's annual revenue has been on the rise for more than a decade, and annual net income has been growing since 2018.

In more good news regarding recovery, Lululemon recently said it expects fourth-quarter revenue and earnings to be at the high end of its expected range. Looking to the long term, the retailer emphasized its commitment to its five-year strategic growth plan. That includes doubling the revenue of its men's line and quadrupling international revenue by 2023.

3. Ross Stores

Ross Stores' (ROST 4.80%) annual net income and revenue have generally increased for most of the past 30 years. That's a pretty solid track record. Ross is one of the U.S.'s biggest off-price retailers, drawing in customers for the latest fashions at ultra-low prices.

Since Ross's business is in-store and not online, the retailer suffered significantly due to last year's temporary store closures. But Ross focused on maintaining a solid financial position. By the end of the third quarter ended Oct. 31, Ross had more than $5.2 billion in total liquidity. The company has started to lower debt costs. For instance, it repaid the $800 million revolving credit facility drawn down earlier in the crisis.

And Ross' sales are improving. In the third quarter, total sales fell 2% to $3.8 billion year over year. That's compared to a 33% drop to $2.7 billion in the previous quarter.

Looking into the future, Ross should benefit from two elements. First, its stores are located in plazas close to where people live and work. These locations have attracted more shoppers in recent years than malls. Second, consumers love low prices -- and the idea of a treasure hunt. When you arrive at Ross, you never know what quality items you might find being sold at a discount.

TGT Chart

TGT data by YCharts

All three of these retailers' share prices have gained since the March crash. Considering their track records, it seems likely that Target, Lululemon, and Ross can handle what's ahead -- including future market crashes.

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Stocks Mentioned

Target Corporation Stock Quote
Target Corporation
$150.42 (2.46%) $3.61
Ross Stores, Inc. Stock Quote
Ross Stores, Inc.
$77.53 (4.80%) $3.55
Lululemon Athletica Inc. Stock Quote
Lululemon Athletica Inc.
$293.36 (2.46%) $7.03

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

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