This year, the holidays are looking different. Last year, lots of people couldn't even leave their homes, but this year, gift-giving might be most affected. As we near the end of the gift-purchasing season and come upon the mad rush of last-minute present-finders, some retailers and product makers will stand out for standing up to supply chain woes.
Three Motley Fool contributors offered their top picks for stocks most likely to trounce the supply chain and come out of this season with robust sales and growth. Target (TGT 1.25%), Etsy (ETSY 2.21%), and Home Depot (HD -0.08%) made the cut.
Shelves will be full at your local Target
Jennifer Saibil (Target): If you've been shopping, you might have already encountered some of the shortages caused by bottlenecks throughout the long supply chain that gets products across the globe and brings them to your door, or your local store. But if you shop at Target, you might not notice that there's a global shortage of many items. On the third-quarter conference call, CEO Brian Cornell said, "Our team has done an outstanding job in the face of these challenges, identifying bottlenecks and finding solutions to keep inventory flowing throughout our network."
Management emphasized that keeping up a plentiful stock of inventory in Q3 came along with higher costs, pressuring margins. The company is also dealing with wage increases, a core part of its mission. That's adding to the pressure, but Cornell stressed that not only was it a key element of keeping a tip-top team, but that it was also an investment in the company's future. A third pressure is inflation, resulting in higher costs for the company. Gross margin decreased 2.6% year over year in the third quarter to 28%, while operating margin decreased 70 basis points (0.7%). Same-day options, which are a prime growth driver for Target, had a net positive effect on margins, since they have "meaningfully lower average unit costs" than standard digital fulfillment. That bodes well for Target to increase profitability as it maximizes same-day shopping options such as drive-up, pickup, and same-day delivery. These are likely to play an essential role in the ever-important holiday shopping season, and even more so as shoppers embrace the omnichannel shopping environment which Target presents so successfully.
Third-quarter comps growth of 13% exceeded expectations of high single-digit year-over-year comps growth, leading to management raising expectations for the fourth quarter to high single-digit or low double-digit growth. With full shelves this holiday season, this retail stock is on the way to another blowout quarter.
No inventory needed
John Ballard (Etsy): Etsy is a no-brainer e-commerce stock to consider in this environment. What's more, the stock has fallen about 25% over the last month after the company reported third-quarter earnings, which could be a timely buying opportunity heading into 2022.
Investors can blame lower-than-expected guidance for the fourth-quarter stock price slump, but Etsy is doing fine. Revenue grew 18% year over year in the third quarter, beating expectations. The latest results show that Etsy's unique marketplace of one-of-a-kind items is still attracting users at a good clip, especially on top of the triple-digit growth rates reported in the same quarter last year.
Etsy finished the quarter with 7.4 million active sellers and 95 million active buyers. It has no logistics infrastructure, no warehouses, and no inventory sitting on idle cargo ships consuming massive amounts of capital. Even many of Etsy's sellers are not dependent on new inventory, but instead, thrive on selling secondhand items to buyers looking for something special.
Etsy has a capital-light business model that generates high margins from charging fees to sellers for items sold and various other services. It generated $581 million of free cash flow on $2.2 billion of revenue over the last four quarters. That puts the stock's price-to-free cash flow ratio at 55, which isn't cheap, but I believe it's a fair price to pay for a high-margin, growing business that is immune to supply chain issues and can separate itself from the Amazons of the world.
Home Depot management has done a masterful job during the pandemic
Parkev Tatevosian (Home Depot): Home Depot is one company that can overcome supply chain issues this holiday shopping season. It's a good thing, too, because demand for home improvement goods has been surging since the onset of the pandemic. Folks are spending more time working and entertaining at home, leading to an increased desire to customize spaces to fit new uses.
Indeed, Home Depot's sales in the first three quarters of fiscal 2021 are a whopping $15.5 billion higher than at the same time last year. And it's not like Home Depot is lowering prices or offering many incentives for folks to come to their stores. That's evidenced by Home Depot's net profit up 31% from last year's nine months. The demand for home improvement is organic and created by the changing behavior and lifestyles of individuals in the U.S.
Thankfully, Home Depot has used its leverage and scale as the largest home improvement retailer to have sufficient supply to meet the surging demand. And heading into the holiday season, Home Depot has secured $20.5 billion in inventory, up by more than $4.4 billion from the $16.1 billion it had at the same time last year.
Management took no chances heading into its fourth quarter. It did what was necessary to procure what the stores needed to satisfy customer demand. It looks like the last thing Home Depot wanted was for a customer to leave their store empty-handed because they couldn't find what they were looking for. That scenario is a double whammy; not only does the customer not buy something from you, but they might go to your competitor and buy from them. Home Depot shareholders can rest assured that it has expertly dealt with supply chain disruptions, and its shelves will be ready this holiday season.