Miscellaneous Retail Industry Outlook: Margin Woes to Stay

The Zacks Retail – Miscellaneous industry covers retailers of sporting goods, office supplies, and specialty products, distributors of beauty products, and sellers of a wide range of domestic merchandise. Some of the industry participants operate rural lifestyle retail stores, arts and crafts specialty outlets and also provide used car auction and salvage auction services.

Let’s take a look at the industry’s three major themes:

• The industry’s prospects are directly correlated with the purchasing power of consumers. In fact, a strengthening labor market and rising disposable income are encouraging higher consumer spending. The U.S. economy added 224,000 jobs in the month of June. Per the Commerce Department, consumer spending rose 0.4% in May supported by a 0.5% increase in personal income. No wonder, a few industry players have been on a tear. Moreover, continued restructuring and expansion initiatives, including store openings and enhancement of distribution centers, should improve the performance of industry constituents. Companies’ unwavering focus on boosting store transactions should also push comparable store sales higher.
  

• Most companies in the space are working on providing a wide assortment of products, enhancing in-store and online experience, and adopting a favorable pricing strategy to boost sales and achieve economies of scale. Initiatives like building omni-channel operations, coming up with reward programs, developing innovative products and services, and pursuing buyouts are worth a mention. The companies are also looking to curtail costs, lower risks in supply chain management, boost sales via targeted marketing and optimize business processes.
  

• The brick-and-mortar retail business, which is the model for most companies in the Zacks Retail – Miscellaneous industry, has turned highly competitive since Amazon (AMZN) gained dominance over all business areas and altered the way consumers shop. With the evolving shopping patterns, a significant number of players have been making higher investments to bolster their omnichannel operations. To that end, they are making constant digital innovation alongside undertaking store remodeling and refurbishments. While these endeavors could boost sales, they entail high costs. Apart from these, higher marketing, advertising and other store-related expenses might compress margins.

Zacks Industry Rank Indicates Dismal Prospects

The Zacks Retail – Miscellaneous industry is a 15-stock group within the broader Zacks Retail – Wholesale sector. The industry currently carries a Zacks Industry Rank #156, which places it in the bottom 39% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since the beginning of the year, the industry’s earnings estimate for the current year has moved down approximately 8%.

Despite the industry’s drab near-term prospects, we will present few stocks that have the potential to outperform the market. But before that, it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Vs Broader Market

The Zacks Retail – Miscellaneous industry has outdone the broader Retail – Wholesale sector but has underperformed the Zacks S&P 500 composite over the past year.

The industry has risen 3.6% over this period compared with the S&P 500 index’s gain of 5.3% and the broader sector’s increase of 2%.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month Price-to-earnings (P/E) ratio, which is commonly used for valuing retail stocks, the industry is currently trading at 14X compared with the S&P 500’s 17.26X and the sector’s 24.39X.

Over the last five years, the industry has traded as high as 20.31X, as low as 12.06X and at the median of 15.05X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

A few companies in the industry are resorting to location analytics and other data-driven tools to better engage with customers. Such efforts along with pricing mechanism, inventory management, wider range of products and other operational initiatives should support sales. However, deleverage in the SG&A rate, rising rents and higher operating costs might dent margins.

That said, we are presenting four stocks from the Retail – Miscellaneous space that are well positioned to capitalize on the above-mentioned opportunities. Of these, the first stock sports a Zacks Rank #1 (Strong Buy) and the remaining three carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Hibbett Sports, Inc. (HIBB): For this retailer of athletic-inspired fashion products, the consensus EPS estimate for the current fiscal has remained stable over the last 30 days. This stock has surged roughly 27% in the past six months. The company has an estimated long-term earnings growth rate of 6.5%. In the last two reported quarters, the company has outperformed the Zacks Consensus Estimate by a wide margin.

Price and Consensus: HIBB

Build-A-Bear Workshop, Inc. (BBW): This St. Louis, MO-based specialty retailer of plush animals and related products has gained about 24% in the past six months. This company has an estimated long-term earnings growth rate of 9%.
 
Price and Consensus: BBW

DICK'S Sporting Goods, Inc. (DKS): This Coraopolis, PA-based full-line sporting goods retailer has gained 15% so far in the year. The Zacks Consensus Estimate for the company’s current-fiscal EPS has been stable in the last 30 days. The company has an estimated long-term earnings growth rate of 5.6%. The company has an average positive earnings surprise of 16.2% for the trailing four quarters.

Price and Consensus: DKS

Tractor Supply Company (TSCO): This stock has gained roughly 41% in a year’s time. The Zacks Consensus Estimate for the company’s current-fiscal EPS has been stable in the last 30 days. The operator of rural lifestyle retail stores has an estimated long-term earnings growth rate of 11.4%. The company has an average positive earnings surprise of 7.4% for the last four quarters.

Price and Consensus: TSCO

 
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Tractor Supply Company (TSCO) : Free Stock Analysis Report
 
Hibbett Sports, Inc. (HIBB) : Free Stock Analysis Report
 
DICK'S Sporting Goods, Inc. (DKS) : Free Stock Analysis Report
 
Build-A-Bear Workshop, Inc. (BBW) : Free Stock Analysis Report
 
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