The Zacks Retail – Miscellaneous industry participants have been focusing on superior product strategy, advancement of omni-channel capabilities and prudent capital investments to strike the right chord with consumers. Ulta Beauty, Inc. ULTA, Tractor Supply Company TSCO, Five Below, Inc. FIVE and Arhaus, Inc. ARHS look well poised, courtesy of their business operating model, growth prospects and cost structure.
However, product cost inflation, tight labor market and supply-chain issues are some of the headwinds that players in the industry have been encountering.
About the Industry
The Zacks Retail – Miscellaneous industry covers retailers of sporting goods, office supplies, and specialty products as well as sellers of a wide range of domestic merchandise. It also includes retailers of beauty products providing cosmetics, fragrances, skincare and haircare products, and salon styling tools. Some of the industry participants operate rural lifestyle retail stores, arts and crafts specialty outlets and sell their products to farmers, ranchers, and others as well as tradesmen and small businesses. The industry also comprises recreational boat and yacht retailers as well as specialty value retailers offering a broad range of trend-right, high-quality merchandise targeted at tween and teen customers. The players’ profitability depends on a prudent pricing model, a well-organized supply chain and an effective merchandising strategy.
4 Key Industry Trends
Consumers’ Willingness to Spend: The industry’s prospects are correlated with the purchasing power of consumers. The players in the industry have been focusing on deepening engagements with consumers and enhancing digital and data analytics capabilities. We believe that stimulus savings from last year, steady wage gains and a lower unemployment rate kept the demand alive this holiday season. Data compiled by the National Retail Federation (NRF) showed that holiday retail sales increased 5.3% year over year to $936.3 billion during 2022’s November-December period. Retail sales rose 3% on a sequential basis and 6.4% year over year in the month of January, per the Commerce Department.
Focus on Boosting Portfolio & Market Reach: Most companies in the space are working on providing a wide assortment of products, enhancing the online experience and adopting a favorable pricing strategy to boost sales. Initiatives such as building omni-channel operations, coming up with reward programs, and developing innovative products and services are worth mentioning. There has been an increase in demand for office supplies, personal care items, domestic merchandise products and fitness-related products. Companies are looking to fuel sales via targeted marketing.
Digitization Key to Growth: With the change in consumer shopping patterns and behavior, industry participants have been playing dual in-store and online roles. In this respect, the industry players have been directing resources toward digital platforms, accelerating fleet optimization and augmenting the supply chain. In fact, companies’ initiatives to expand delivery options — curbside pickup or ship-to-home orders — and contactless payment solutions have been a boon. Additionally, retailers are investing in renovation, improved checkouts and mobile point-of-sale capabilities to keep stores relevant. Keeping in mind consumers’ product preferences and inclination toward online shopping, retailers are replenishing shelves with in-demand merchandise and ramping up investments in digitization.
Eye on Margins: Companies in the industry are vying for a bigger share on attributes such as price, products and speed to market. They have been accelerating investments to strengthen the digital ecosystem and boost shipping and delivery capabilities. While these endeavors drive sales, they entail high costs. Apart from these, any deleverage in SG&A rate, higher labor and occupancy costs, and increased marketing and other store-related expenses might build pressure on margins. Of late, the industry participants have been dealing with high labor costs amid the tight labor market, increased freight costs and supply-chain issues. Nonetheless, companies have been focused on undertaking initiatives to mitigate cost-related challenges. These include streamlining operational structures, optimizing supply networks as well as adopting effective pricing policies.
Zacks Industry Rank Indicates Solid Prospects
The Zacks Retail – Miscellaneous industry is housed within the broader Zacks Retail–Wholesale sector. The industry currently carries a Zacks Industry Rank #97, which places it in the top 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 encouraging 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 top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Vs. Broader Market
The Zacks Retail – Miscellaneous industry has outperformed the broader Retail – Wholesale sector and the Zacks S&P 500 composite over the past year.
The industry has risen 6.1% over this period against the S&P 500’s decline of 10.9%. Meanwhile, the broader sector has fallen 16.4% in the said time frame.
One-Year Price Performance
Industry’s Current Valuation
On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing retail stocks, the industry is currently trading at 19.61X compared with the S&P 500’s 17.87X and the sector’s 21.52X.
Over the last five years, the industry has traded as high as 24.96X, as low as 11.28X and at the median of 16.52X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
4 Retail – Miscellaneous Stocks to Keep a Close Eye On
Ulta Beauty: The company has been strengthening its omni-channel business and exploring the potential of both physical and digital facets. It has been implementing various tools to enhance guests’ experience, like offering a virtual try-on tool and in-store education, and reimagining fixtures, among others. Ulta Beauty focuses on offering customers a curated and exclusive range of beauty products through innovation.
This beauty retailer and a premier beauty destination for cosmetics, fragrance, skincare products, hair care products and salon services has a trailing four-quarter earnings surprise of 26.2%, on average. This Zacks Rank #2 (Buy) company has an estimated long-term earnings growth rate of 13.8%. The Zacks Consensus Estimate for Ulta Beauty’s current financial year sales suggests growth of 15.8% from the year-ago period. Shares of ULTA have rallied 38.8% in the past year.
Price and Consensus: ULTA
Arhaus: Strong consumer demand, new collections, brand awareness and ramp-up of new showrooms have been driving Arhaus’ top-line performance. The company plans to add five to seven new traditional showrooms per year. Arhaus estimates fiscal 2022 net revenues in the band of $1,223 to $1,228 million and foresees comparable growth in the bracket of 51% to 51.4%.
The Zacks Consensus Estimate for current financial-year revenues and EPS suggests growth of 54% and 26.1%, respectively, from the year-ago reported figure. This Zacks Rank #2 company has a trailing four-quarter earnings surprise of 112%, on average, and an estimated long-term earnings growth rate of 16.1%. Shares of this lifestyle brand and omni-channel retailer of premium artisan-crafted home furnishings have surged 110% in the past year.
Price and Consensus: ARHS
Tractor Supply Company: This largest rural lifestyle retailer in the United States has been benefiting from its robust business strategies, “Life Out Here” and everyday low pricing, as well as favorable consumer demand for product categories. In addition, Tractor Supply’s Neighbor’s Club loyalty program remains sturdy. Its omni-channel initiatives, including curbside pickup and same-day delivery, have been aiding digital sales. We note that strength in everyday merchandise, including consumable, usable and edible products, has been fueling sales.
Tractor Supply has a trailing four-quarter earnings surprise of 5.6%, on average. The company has an estimated long-term earnings growth rate of 10%. The Zacks Consensus Estimate for current financial-year revenues and EPS suggests growth of 7.1% and 7.7%, respectively, from the year-ago reported figure. Shares of this Zacks Rank #3 (Hold) company have risen 13.1% in the past year.
Price and Consensus: TSCO
Five Below: The company’s strategic endeavors and value-oriented offerings position it well amid a price-sensitive environment. Its focus on trend-right products, digitization, pricing strategy, store expansion and supply chain network should help navigate the tough retail landscape. Five Below posted sturdy holiday sales results, with net sales increasing 11.2% to $1,003.7 million and comparable sales rising 0.9%.
Five Below has a trailing four-quarter earnings surprise of 26.3%, on average. This Zacks Rank #3 company has an estimated long-term earnings growth rate of 19%. The Zacks Consensus Estimate for current financial-year revenues suggests growth of 7.4% from the year-ago reported figure. Shares of this extreme-value retailer for tweens, teens and beyond have jumped approximately 26.5% in the past year.
Price and Consensus: FIVE
5 Stocks Set to Double
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