E-commerce has been ripe territory for investors since the early days of the internet.
Stocks like Amazon and Shopify have delivered monster returns over the years, showing the power of online retail for both investors and companies that have taken advantage of the new shopping channel.
Still, when it comes to actual sales volume, brick-and-mortar reigns supreme. You might think a majority of U.S. retail sales take place online but that isn't the case. According to the Census Bureau, only about 13% of total retail sales, which includes categories like automobiles, goes through the e-commerce channel.
With that in mind, it's a good idea to consider both brick-and-mortar and e-commerce stocks if you're looking to capture some of the growth in retail. Keep reading to see four top stocks that have thrived during the pandemic.
Image source: Getty Images.
1. Target
Target (TGT 1.73%) shares are up 70% since the start of 2020, and it's easy to see why. Sales and profits have soared at the big-box chain over the past two years as it's been perfectly positioned during the pandemic. By offering essentials like food and paper products in addition to discretionary items like clothes and home goods, Target has attracted customers as an easy place to stock up on groceries during the pandemic, and been able to sell them other items like televisions and toys.
Comparable sales jumped 19.3% in 2020 and was up 14.4% through the first three quarters, with earnings per share more than doubling over the last two years.
Target has benefited from its strength in omnichannel-the combination of brick-and-mortar and e-commerce-as its curbside pickup program, Drive Up, has seen sales jump more than 2,000% during the pandemic. It also offers its customers something that Amazon can't match. As a multi-category retailer, Target only has a few direct competitors like Walmart, Costco, and Amazon and it has succeeded in differentiating itself from its peers through programs like Drive Up, its small-format stores, a focus on owned brands that are unique to Target and its "cheap chic" image.
2. Children's Place
Like most apparel retailers Children's Place (PLCE +10.28%) shares plunged during 2020 as non-essential retailers were forced to shut down, and apparel sales wallowed as stay-at-home orders and social distancing killed demand for new clothes.
However, 2021 has been a different story for the leading pure-play children's apparel retailer. Sales and profits have soared as the company has benefited from school reopening, a rebound from delayed clothing purchases in 2020, and streamlined operations as it accelerated store closures in 2020.
In its third-quarter earnings report, the company reported records in sales, earnings per share, operating margin, and gross margin. Through the first three quarters of 2021, sales were only up modestly from pre-pandemic levels, but adjusted net income nearly tripled to $155.3 million, or $10.37 a share. Cost cuts, including store closings, helped drive the surge in profits.
Children's Place has been in the midst of a "store rationalization" program for several years, slowly closing down stores and shifting sales to the online channel. In the third quarter, digital sales made up 45% of its total, which management said was tops for the industry. Because online sales now make up nearly 50% of its revenue, and growing, investors should think of the company as more than just a sleepy brick-and-mortar apparel retailer. However, the stock currently trades at a bargain price-to-earnings ratio of less than 6 based on this year's expected earnings, a sign Children's Place is mispriced.
3. Revolve Group
Another apparel stock that was hit hard by the early days of the pandemic was Revolve Group (RVLV 4.17%), an online apparel retailer that caters to millennials and Gen Z through influencer-driven marketing. The company struggled in 2020 as the business is focused on occasion-wear for weddings, parties, and events like music festivals, with its biggest category being dresses. Sales increased just 3% that year, but the company managed to deliver solid bottom-line growth, a credit to management's ability to effectively manage inventory during a difficult time.
In 2021, sales have taken off along with the economic reopening. Revenue jumped 62% in the third quarter, which was 58% above Q3 2019 levels, giving it momentum into 2022, which should be an even stronger year for social events once the Omicron wave fades. The company also recently signed supermodel Kendall Jenner, one of the most followed people in the world, to be the Creative Director of FWRD, its luxury division, a move that should help attract more attention to the brand.
In addition to the strong sales growth, Revolve's gross margin is around 55%, among the tops in retail, showing its strong profit potential as it builds out its business. With the stock down near 50%, now could be an excellent buying opportunity.
4. Carparts.com
Carparts.com (PRTS 1.92%) is a small-cap online auto parts retailers that has gotten relatively little attention during the pandemic despite skyrocketing gains. Since the start of 2020, the stock is up more than 300%, and had gained nearly 900% at its peak last year.
The company benefited from the boom in e-commerce during the global health crisis as well as increased interest in auto parts as DIY car projects became a hobby for many Americans during the months of social distancing. After a 58% surge in revenue in 2020, sales rose another 33% to $582 million in 2021 as the company is quickly grabbing market share in an addressable market worth hundreds of billions of dollars.
After new management took over the company in 2019, Carparts.com has expanded its capacity by adding new warehouses around the country and is able to deliver to most of the U.S. population in two days. That delivery speed helps it attract new customers and increase customer loyalty. Currently, sales growth is being constrained on the supply side as demand is strong. This spring it's planning to open one new distribution center in Florida and expand Texas location, adding capacity, which should help drive growth.
Over the long term, the company expects to generate 20%-25% revenue growth and adjusted EBITDA margin of 8%-10%. With that kind of growth target, the stock looks undervalued at price-to-sales ratio of around 0.8.
