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2 Solid Retail Stocks to Put in Your Shopping Basket

By Rich Duprey and Eric Volkman – Aug 17, 2021 at 11:42AM

Key Points

  • One retailer, in particular, stands out for its capital appreciation and dividend returns.
  • This warehouse club shows why it can still generate big returns.

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Even with clouds on the economic horizon, these two retailers can still shine through.

The market has been a bit frothy, regularly hitting new record highs, but signs that China's economy might be slowing recently sent U.S. stock markets lower. We've had an amazing bull run that was interrupted by the pandemic, yet one that also quickly regained its footing to charge ahead once more.

No one can predict a market crash, but savvy investors know to prepare for one, regardless. Finding stocks that can weather such storms is good insurance against the inevitable, and the two retailers below have proved themselves in all types of market conditions.

Both Target (TGT -0.02%) and Costco (COST -0.15%) have proved their mettle over time. Now learn why they still offer investors that same sort of umbrella protection in the quarters and years ahead, even if the broader market has reached its peak.

Woman in red apron hanging We're Open sign.

Image source: Getty Images.

This one really hits the mark

Eric Volkman (Target): The one retailer that has consistently impressed me throughout the coronavirus pandemic is Target, which at this point needs little or no introduction to American consumers.

Even though it's been a familiar name in retail for decades, Target has really come into its own lately. The pandemic was and is a monster challenge that the company conquered beautifully.

In 2017, under pressure from market-share-stealing eCommerce players like Amazon, it ponied up $550 million for quick-delivery specialist Shipt. It also launched a set of order-pickup services.

Both initiatives blossomed to serve the company particularly well in the thick of the pandemic last year and continue to drive sales. Customers clearly love these options. For the entirety of fiscal 2020, Target's online comparable sales rose a whopping 143% last year to comprise almost 18% of total sales (2019 level -- just shy of 9%). Same-day services rose by an even more impressive 235%.

Growth might cool as we move through this year, but Target's top line should see improvement, regardless. Robust profitability is likely in the cards, too.

For the second half of 2021, the company is forecasting comparable-sales growth in the single-digit percentages. Although Target hasn't proffered any bottom-line projections, the average analyst estimate for per-share, annual non-GAAP (adjusted) net profit growth is a very impressive 30%. That's on the back of an anticipated 9% improvement in total revenue, compared to 2020.

Target has also been in the sights of dividend investors lately, thanks to the attention-getting 32% raise the company recently made to its quarterly shareholder payout. The company is a frequent lifter -- so much so that it's about to become one of the very few Dividend Kings on the market. These rare beasts are the S&P 500 companies that have raised their payouts at least once every year for a minimum of 50 years running.

Thanks to recent and pronounced share-price appreciation, Target's dividend yield isn't exceptionally high, at 1.4%. But this is one of the most reliable dividend payers on the scene, and the company has considerable organic growth in front of it.

Investors hunting for an ideal retail stock should consider pulling back their bows and firing squarely at this one.

Man shopping in warehouse club

Image source: Getty Images.

Join the club 

Rich Duprey (Costco): There are few retailers with a more solid foundation on which to continue growing than Costco. It delivers not only for consumers, with its low prices and broad product selection, but also for investors.

The warehouse club buys in bulk and passes those savings onto consumers, who keep returning to its stores in droves. It just reported that comparable U.S. net sales for July, excluding fuel and currency-exchange rates, were up 8.5% for the month and are almost 14% higher year to date. Worldwide, Costco's comps were 8% and 13.8%, respectively, higher.

And though its cavernous warehouses get most of the attention, it has developed an extensive e-commerce presence that's also attracting returning shoppers. Online comps were up 5.7% last month and a whopping 47% year to date.

Even so, merchandise isn't where Costco makes its money. That comes from the memberships it sells. Over the first six months of Costco's fiscal year, the retailer generated over $2.1 billion in net earnings, or just a little more than the $1.7 billion it sold in memberships, indicating they're almost all pure profit.

Costco tends to raise its membership fees every five years. The last time it did so was in 2017, so it's due for another one soon. With 60.6 million paid worldwide households, that would be another $1.7 billion in revenue in its pocket, giving the retailer some very firm footing to keep growing.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Costco Wholesale. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Costco Wholesale Stock Quote
Costco Wholesale
COST
$533.66 (-0.15%) $0.83
Target Stock Quote
Target
TGT
$163.38 (-0.02%) $0.03
Amazon Stock Quote
Amazon
AMZN
$93.41 (-0.77%) $0.72

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

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