Many retail stocks have rallied over the past few months as investors rotated from pandemic-oriented stocks toward reopening ones. But the retail sector is still littered with landmines: Companies that struggled prior to the pandemic could fare even worse after it ends, and the secular declines of malls and brick-and-mortar stores are far from over.
Today, I'll highlight three retailers that should avoid those traps: Pan Pacific International (DQJCY -2.22%), JD.com (JD 1.92%), and Target (TGT -0.86%). The first two stocks represent great ways to diversify your portfolio overseas, while the last one remains a top play in the domestic market.
1. Pan Pacific International
Pan Pacific International is one of Japan's largest retailers. It owns Don Quijote, the country's top discount retailer; the Piago, Apita, Picasso, and Nagasakiya retail chains; and a real estate rental business.
Pan Pacific's sales rose 41% in fiscal 2019, then grew another 27% to 1.68 trillion yen ($15.2 billion) in fiscal 2020, which ended last June. Its earnings increased 29% in 2019 and 7% in 2020.
The pandemic temporarily throttled Pan Pacific's growth, but analysts still expect its revenue and earnings to grow 3% and 12%, respectively, for the full year. The company also reiterated its long-term growth plan of generating 3 trillion yen ($27.1 billion) in revenue by fiscal 2030.
It expects to achieve that goal by expanding its domestic store count, which hit 631 locations at the end of 2020, as well as its overseas presence in fertile markets like Hong Kong, Taiwan, Thailand, Singapore, and the U.S.
Pan Pacific should recover quickly in a post-pandemic world as tourists return to Japan, since its Don Quijote stores are usually popular destinations for overseas shoppers. That's why Pan Pacific's stock price rallied nearly 35% over the past 12 months as many other Japanese stocks withered.
Pan Pacific's stock might seem a bit pricey at 29 times this year's earnings, but Don Quijote's dominance of the country's discount retail space, its ability to continue opening new stores as other brick-and-mortar stores retreat, and its confident 10-year outlook all justify that slight premium.
JD.com is China's largest direct retailer and its second-largest e-commerce company. Unlike Alibaba (BABA -0.05%), the country's e-commerce leader that owns the Taobao and Tmall marketplaces, JD takes on inventories and fulfills its own orders.
JD's approach is more capital-intensive than Alibaba's paid listing platforms for third-party sellers, but it shields its shoppers from counterfeit products. JD also doesn't face an antitrust probe like Alibaba, which could be forced to end its exclusive deals with merchants and promotional pricing strategies in the near future.
JD's revenue rose 29% to 745.8 billion yuan ($114.3 billion) in 2020. Its annual active customers increased 30% to 471.9 million, led by its expansion into China's lower-tier cities. Its adjusted operating margin also expanded, and its non-GAAP net income soared 57% to 16.8 billion yuan ($2.6 billion).
JD's logistics business previously throttled its margins, but economies of scale are finally kicking in and the business is now generating higher-margin revenue by serving third-party customers. Alibaba's ongoing troubles could also send more brands and shoppers to JD's marketplace.
Analysts expect JD's revenue and earnings to rise 25% and 21%, respectively, this year. The stock still looks reasonably valued at 30 times forward earnings, and it remains a much safer bet on China than the country's other regulation-prone tech giants.
Back in the U.S., Target remains one of the greatest retail turnaround stories in recent years. Once considered a victim of the retail apocalypse, Target righted its ship by renovating its aging stores, penetrating urban areas with smaller-format stores, expanding its e-commerce ecosystem, turning its stores into fulfillment centers for online orders, and launching new private label brands.
Brian Cornell, who took over as Target's CEO in 2014, led those efforts. By the time the pandemic started last year, Target was well-equipped to handle the crisis. Its comparable-store sales surged 19.3% in fiscal 2020, with 7.2% comps growth in brick-and-mortar stores and 145% growth in its digital comps.
Target's total revenue rose nearly 20% to $93.6 billion, reflecting more growth than its past 11 years combined, and its earnings grew 36%. Analysts expect Target's revenue and earnings to dip 2% and 8%, respectively, this year, due to tough post-pandemic comparisons, but to improve again in fiscal 2022. The stock still looks cheap at 21 times forward earnings, and it pays a decent forward dividend yield of 1.4%.
Target's stock might lose some momentum this year after more than doubling over the past 12 months, but it still remains one of the best retail stocks in the U.S. and an attractive long-term investment.