The coronavirus pandemic made life even tougher for the already beleaguered retail industry. With some retailers scrambling to bolster their e-commerce efforts and others deciding to close their doors, the adverse effects of COVID-19 forever changed this industry.
Despite massive shifts and strong headwinds, some companies prospered because of the changes and are setting a new course for retail in the process. Companies like Amazon (AMZN -0.22%), BJ's Wholesale (BJ 1.18%), and GrowGeneration (GRWG -4.19%) can help ensure the continued vibrancy of retail stocks as companies emerge from and move beyond the pandemic. Let's take a closer look at these three retail stocks and why now might be a good time to buy.
Despite Amazon's stock trading near record highs, the value proposition of this e-commerce giant remains compelling. It prospered as consumers turned to e-commerce during the pandemic. Its name recognition, competitive pricing, and growing physical presence helped to boost sales.
What makes Amazon even stronger is its diverse operations. Amazon pioneered the cloud computing industry, a division that generated the majority of the company's profits until recently. These cloud profits can carry the company when it wants to increase competition. Furthermore, Amazon just posted an operating margin of 6.6% over the last 12 months. Due to Amazon Web Services' 31% operating margin during that period, it has allowed for massive profit increases despite the 4% margin of its North American retail segment and 2% margin on international sales.
This arrangement explains why the company is still planning for massive growth despite an already mammoth $1.7 trillion market cap. In the most recent quarter, net sales rose 44% from year-ago levels. Additionally, net income increased 224% to $8.1 billion as operating expenses grew more slowly than sales. The company also benefited from an additional $1.7 billion in other income as its equity investments generated additional profits.
These margins allowed the company to generate about $26.4 billion in free cash flow over the last 12 months, which only strengthened its balance sheet. With its current cash flow and more than $73 billion in liquidity, Amazon can easily manage its long-term debt of just under $31.9 billion.
While Amazon does have bright prospects, shoppers could return to physical stores as the U.S. emerges from the pandemic and potentially slow sales growth in the near term. This likely explains why the company did not offer guidance beyond the upcoming quarter. Nonetheless, with a strong balance sheet and its e-commerce and cloud computing segments on a long-term, upward trajectory, Amazon will continue to prosper.
2. BJ's Wholesale
BJ's is a regional warehouse club primarily operating on the U.S. East Coast. Its 221 locations stand out by focusing on a tightened (and refined) assortment of popular goods. It also differentiates itself by emphasizing fresh foods and by offering the discounts of a warehouse club with less emphasis on the bulk package sizes of Costco or Walmart's Sam's Club.
Moreover, its regional footprint holds more potential for expansion, and thanks to the pandemic, it can now realize some of this potential. The increased sales stoked by the contagion helped revenue rise by 17% in 2020. As a result, net income increased by 125% during that period on lower operating expense growth and falling interest costs.
More importantly, the added income may permanently improve BJ's finances. The aforementioned interest costs fell because BJ's generated $676 million in free cash flow, a 276% increase from year-ago levels. With some of this cash, BJ's paid off $574 million in debt, taking its total obligations to $1.1 billion. As a result, BJ's claims $319 million in stockholders' equity, the company's value after subtracting liabilities from assets. This is up from its $54 million in negative equity at the end of 2019.
Like many retailers, BJ's did not provide forward guidance, and growth could lag in the near term as some pre-pandemic shopping patterns return. Nonetheless, the lowered debts should allow BJ's to open new stores at a faster pace. That could lead to higher revenue growth as a larger footprint makes BJ's a convenient option for more customers.
GrowGeneration is quickly emerging as the top hydroponics retailer in the country. Currently, it operates 53 locations between California and Maine. It also hosts an e-commerce site and continues to expand its selection of private label products. With the addressable market and its product selection, it believes it can grow to 100 stores by 2023 and meet an eventual goal to operate in all 50 states.
So far, GrowGeneration is doing what it takes to meet its objective. In 2020, same-store sales rose by 63% from year-ago levels. In comparison, Home Depot's comparable sales surged 20% in 2020 during the same period. That was growth stoked by COVID-19 as it blew past the typical mid-single-digit increases in recent years.
Thanks primarily to robust same-store sales growth, GrowGeneration's revenue of $193 million soared 143% in 2020 versus 2019 levels. GAAP net income also surged 308% during the same period as the company kept operating expenses in check, reduced interest expenses, and earned more income from non-core operations.
Moreover, unlike many retailers, it has expanded its guidance as the country reopens. GrowGeneration estimates it can earn $415 million to $430 million in revenue in 2021, more than double 2020 levels.
The company faces competition, as more than 2,400 hydroponics stores operate in the U.S., according to IBISWorld. However, larger retailers such as Home Depot cannot match GrowGeneration's selection or its private label products. This should help GrowGeneration lead its niche as the cannabis industry rapidly expands.