Investing in retail isn't easy in today's economic environment. Most consumers are looking for bargains around every corner, which has led to a highly promotional retail environment. These promotions have the potential to drive the top line, but at the same time, they lead to margin contraction and bottom-line weakness.
Therefore, you might want to keep an eye out for companies that generate strong cash flow and are capable of improving the bottom line with stock buybacks. Dividend payments are also nice since you get paid regardless of whether the stock rises or falls. That said, every investor desires stock appreciation.
If you're human and desire stock appreciation, then you might want to take a gander at the top-five retailers for the third quarter in regards to net sales on a year-over-year basis. However, looking at these names and then automatically initiating a position might not be a wise investing strategy. Each one of these five retailers has a story to go along with its growth, and some of these growth stories might be more sustainable than others.
Retail dominators
These results come from Retail Info Systems News, which provides essential insight for retailers. Prior to reading about these results, it should also be noted that the results are based on 35 retailers, not every retailer in existence. With that in mind, let's see which company comes in at No. 5 and then work our way up.
No. 5
The No. 5 retailer for net sales in the third quarter: Urban Outfitters (URBN -0.43%), with net sales increasing 12% year over year. Despite the company's consistent top-line growth, fiscal strength, and broad brand diversification that targets a wide range of consumers, the stock continues to under-perform the market, having declined 3.2% over a three-year time frame in a raging bull market. I'm not an investor in Urban Outfitters, but covering it time and time again and seeing how its stock performance doesn't match its underlying business strength is frustrating.
Urban Outfitters' Anthropologie (women's casual apparel and accessories for ages 28-25) and Free People (women's casual attire, intimates, shoes, and accessories for ages 25-30) have been key growth drivers. Urban Outfitters has made merchandise improvements, which has driven demand, and it plans to open more stores. As long as the economy holds its own, the stock should eventually catch up with the business.
No. 4
Cabela's (CAB) saw net sales increase 12.9% in the third quarter. It has also enjoyed eight consecutive quarters of comps growth, with 3.9% comps growth in the third quarter. The problem here is that Cabela's has started seeing less Internet traffic, a decline in ammo sales, a lower average ticket, and a more cautious consumer overall.
While Cabela's is seeing strength in men's and hunting apparel as well as in general outdoors, it's not likely to be enough to keep the company's strong top-line momentum going. However, the company has surprised investors in the past, and any political debates about gun control could quickly lead to increased gun and ammo sales.
No. 3
Lululemon Athletica (LULU -0.03%) comes in at No. 3. The company caught fire by offering high-quality material and a unique culture that offered more personal relationship opportunities with customers than perhaps any other retailer on the planet. However, drama constantly surrounded the company, especially with the recall of its see-through luon pants. However, CEO Christine Day has been replaced, and the company is hoping for less drama in the future. The catch here is that Day is the one who drove the company's success.
On top of not knowing what new CEO Laurent Potdevin has in store, Lululemon is now facing competition from Gap's Athleta brand. This could create a big challenge for Lululemon, especially since Athleta's pants are similar in quality and sell for considerably less.
No. 2
GameStop's (GME 7.58%) third-quarter net sales jumped 18.8%. And the new console cycle, with PS4 and Xbox One in high demand, has the potential to drive significant future growth. GameStop should see strong holiday sales, and it's trading at just 12 times forward earnings.
On top of that, GameStop is the only company on this list to pay a dividend, currently yielding 2.2%. The big risk is if GameStop doesn't perform as well as expected between now and Christmas. This is a high risk/high reward investment.
No. 1
Amazon.com (AMZN -1.64%) doesn't stop growing. Net sales jumped 24% in the third quarter, and it's the best top-line performer in this group for the past year:
Amazon.com revenue (trailing-12 months) data by YCharts
According to ComScore, online spending is expected to grow significantly faster than brick-and-mortar spending over the next several years. Since Amazon is the biggest online retailer, this is a big catalyst for Amazon. At the moment, Amazon is trading at 144 times forward earnings, making it extremely expensive. However, Amazon has been trading at a high multiple for a long time, and it continuously justifies its multiple. This isn't guaranteed going forward, but it should be noted.
Retail conclusion
All five of these companies have strong future potential. The only one I'd be concerned about is Lululemon due to a CEO change and increased competition. Amazon should offer the most growth potential, simply because more consumers shop online every day, especially Millennials. However, the information above should be used as a starting point for further research on each company prior to making any investment decisions.
