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Retail Industry in 2021: The Complete Investors Guide

In 2020 the global retail industry was valued at more than $2 trillion dollars and that amount is expected to increase in 2021. Even though the e-commerce segment of the industry grew substantially last year, I believe that stores with brick-and-mortar locations, such as Target (TGT), Walmart (WMT), Dollar General (DG), Costco (COST), and CVS Health (CVS), stand to benefit the most in 2021.

In March of last year, when the coronavirus pandemic's stark reality came into focus, not only did stocks plunge, we started to see businesses shut down due to orders from local governments. This had a tremendous impact on retail stores.

Aside from the top big box stores with e-commerce capabilities already in place, like Walmart (WMT) and Target (TGT), many iconic retailers that relied on foot-traffic to sell their goods saw their fortunes plummet. Companies that had been around for decades, like J.C. Penney, Brooks Brothers, and Lord & Taylor, fell into bankruptcy.

Though much of the population already used e-commerce to buy some of their purchases, COVID-19 pushed consumers to become even more reliant on online retailers.  One of the biggest beneficiaries of this was Amazon.com (AMZN), whose stock doubled between March and September 2020.

Beginning in November 2020, when Pfizer (PFE) and BioNTech (BNTX) announced their vaccine candidate results, the stocks of stores that heavily rely on in-store customers, like Macy’s (M) and Nordstrom (JWN), started to rally. As a result, the SPDR S&P Retail ETF (XRT) has significantly outperformed the broader market and technology stocks. 

As more people receive the vaccine, a full reopening of the economy is likely to benefit both physical and online retail stores.  The Business Research Company forecasts the global retail market is expected to grow from $20.29 trillion in 2020 to $22.43 trillion in 2021, making the retail industry one to watch in 2021.

What is the Retail Industry?

The retail industry is composed of companies that sell final products to end-user consumers. The industry is part of both the consumer staples and consumer discretionary sectors and includes everything from clothing and department stores to home improvement and auto parts stores. On the consumer staples side, retail companies include discount stores such as Dollar General (DG), grocery stores like Albertsons (ACI), and wholesale clubs like Costco (COST). The cyclical sector includes stores that sell apparel, luxury goods, and specialty products such as electronics and home furnishings.

A Changing Industry 

The retail industry has seen its share of changes over the past few decades. Sixty years ago, there were many mom-and-pop stores and just a few department stores in major cities. Then came big box stores, such as Walmart (WMT), that made it harder for small stores to compete. We also saw large specialty chains such as Home Depot (HD) and Lowes (LOW) that put small specialty stores out of business.

Many department stores, that were successful for decades, were located in malls, which were very popular when I was young, but malls have seen less foot traffic over the past ten years. Many of these stores, like Sears, didn’t successfully transition to growing their online presence quickly enough, and are struggling now. 

Traditionally, if you wanted to purchase a product, you would go to the store, pick it up and pay for it. But now, online shopping has changed retail. All you need to do is select a product on a store’s website, pay for it, and it's shipped to your home. You never have to leave your house.

Not only is the ease of e-commerce beneficial for the consumers but the retailers benefit as well.  Stores don't need to pay the overhead costs of maintaining as many, or any, physical stores. 

Impact of COVID and the Future of Retail

While the switch to e-commerce started years before the pandemic, it only accelerated during it. According to Digital Commerce 360, in 2020 consumers spent $861.12 billion online with U.S. merchants, up an incredible 44.0% year over year.

However, as more people are vaccinated in 2021, and venture out of their homes, physical retailers are expected to benefit.  eMarketer predicts that worldwide ecommerce growth will fall by 14.3% in 2021.  That’s because of a brick-and-mortar rebound and so much growth was pulled forward to 2020.

Stores with both a physical and an online presence, like Target (TGT) and CVS Health (CVS), survived and even thrived during the past year,  due to their omnichannel capabilities, such as order online and curbside pickup.  Stores like these should continue to see gains even after the COVID-19 pandemic is behind us.

That’s because we live in a society where people want things right away and aren’t willing to wait a day(s) to have them shipped.  For example, if you have a bad headache and need some Tylenol, chances are you’ll probably drive to a store, such as Rite Aid (RAD), and get it right away.

Also, people enjoy the experience of going to stores, walking down the aisles, and looking/touching the products they’re considering buying. This is simply something that e-commerce-only companies cannot match.

Which is why I’m highlighting five retail stocks with physical storefronts below that are likely to see gains in 2021.

Retail Stocks to Buy

Target Corporation (TGT)

TGT is one of the largest discount retailers in the country, with about 1,900 stores in the U.S. While the company is reporting its latest earnings results next week, its previous quarter was strong as earnings and revenues outperformed estimates. During the quarter, online and in-store sales rose 20.7%, while digital sales surged 155%. The company's curbside pickup was very popular, increasing by more than 500%. Furthermore, its home delivery service, Shipt, increased by nearly 280%.

The company is benefiting from a trend in consumers shopping at discount stores that should continue for the foreseeable future. Its same-day services such as Drive Up & Pick Up are bringing more customers to their stores. Its partnerships should further enhance its product offerings, such as its latest partnership with Ulta. TGT is also increasing its private label products and its Food & Beverage business, which should aid growth.

TGT has a Strong Buy Rating in our POWR Ratings system. The company has a Growth Grade and Value Grade of B, indicating that its growth prospects are not only strong, but it's trading at an attractive valuation. Plus, analysts love the stock with a Sentiment Grade of B. If you want to know its Quality, Momentum, and Stability Grades, you can find them here.

The company is also ranked #1 in an A-rated industry, Grocery/Big Box Retailers. For more top stocks in that industry, click here.

Walmart Inc. (WMT)

While TGT is large, WMT is the world's largest retailer. It operates Walmart Stores, Supercenters, and Sam's Club locations in the United States. It also has a fast-growing e-commerce business, which includes Walmart.com and Jet.com. In fact, WMT is even gaining steam on AMZN in the e-commerce space. The retailer offers two-day shipping on many items to any customers, something that requires membership on AMZN.

Like TGT, WMT's omni channel platform will keep bringing in customers. The company launched its Walmart+ subscription delivery service in September, which is priced at $98/year. While you don't need the membership to get free two-day shipping, the membership provides free next-day and two-day shipping with no order minimum. It also offers free delivery from your store. Plus, WMT now also provides healthcare & financial services, including insurance.

WMT has an overall grade of B, which translates into a Buy in our POWR Ratings system. It also has a Value Grade of B, which is not surprising given its forward P/E of 23.75. The company has a Quality Grade of B, meaning it has a healthy balance sheet. As of its most recent quarterly report, the company had $14.3 billion in cash, compared to $4.6 billion in short-term obligations. We also provide Growth, Momentum, Stability, and Sentiment grades for WMT, which you can find here.

WMT is ranked #10 in the same A-rated industry as TGT.

Costco Wholesale Corporation (COST)

While TGT and WMT are two of the largest and most well-known discount stores, COST is one of the most-well known warehouse clubs. A warehouse club is a membership-based store where customers can purchase bulk items, which provides substantial savings. Customers can also access COST's selection of branded and private label products in an assortment of categories.

The company and its stock fared quite well over the past year. Its stock was up 32.7% last year. While the stock has fallen back some this year, the company just reported massive numbers for January. The company's comparable traffic rose 5.1% in the U.S, and adjusted comparable sales surged over 15% year over year. The company continues to add new stores, and with a very loyal customer base (90% membership renewal rate), I don't see any reason why the company won't see continued success.

The company has an overall grade of B or a Buy Rating in our POWR Ratings system. It also has a Value Grade of B, which means you can pick it up at a reasonable price. While its P/E is slightly elevated, its Price to Sales is quite low. COST also has a Sentiment Grade of B, indicating that it is well liked by Wall Street Analysts. According to the StockNews Price Target feature, twenty-two out of thirty-four analysts rate it a Buy or Strong Buy. Based on its average price target, the stock has a potential upside of 14%. If you would like to know how COST fares in its Growth, Momentum, Stability, and Quality Grades, click here.

Similar to TGT and WMT, COST is in the A-rated Grocery/Big Box Retailers industry. It is ranked #11 in the industry.

Dollar General Corporation (DG)

WMT and TGT may be the biggest discount stores, but DG has some of the best prices. It is the largest dollar store chain in the U.S. by revenue and second-largest by store count. The company has a long history of consistent sales and earnings growth in both healthy and challenging retail climates. So, it was no surprise that the company performed well in the pandemic.  

The company has expanded into e-commerce with DG Pickup, which should only bolster its growth story and even help it compete with the big boys (WMT, TGT, and AMZN). DG opened 1,000 new stores last year and plans to open more than that this year, which should further aid growth. The company's DG Fresh initiative, which includes adding more frozen and chilled products to its stores, should also bring in more customers. Stores are located in thinly populated areas where consumers can't access the big box stores, so DG stores should see continued demand.

The company is rated a Buy in our POWR Ratings system. Like many of the other names on this list, DG has a Value Grade of B. Even with all the success, it has seen, it is still trading at a P/E under 20. DG also has a Quality Grade of B and a Sentiment Grade of B. The company has a strong balance sheet with a current ratio of 1.3 and is quite profitable with a return on equity of 36.5%. Analysts are fans as well, with twenty-three out of twenty-nine rating it a Strong Buy or Buy. We also grade DG based on Growth, Momentum, and Stability. You can find those grades here.

DG is ranked #14 in the Grocery/Big Box Retailers industry.

CVS Health Corporation (CVS)

CVS is one of the largest healthcare companies in the U.S. and one of the most popular drugstores. As I've written about before, I believe the vaccine rollout will benefit pharmacies such as CVS. When a customer goes to CVS to get their free vaccine, they are likely to purchase other items after getting their shot. 

Jeffries analyst Brian Tanquilut recently upgraded CVS to a Buy and believes that the company could see an additional $1 billion in profits over the next year. While the company's integration with Aetna will certainly provide more free cash flow, I am more bullish on its efforts to expand its offerings in its stores. I believe it's HealthHUB concept could be a game-changer. While many of its stores already offered a MinuteClinic, HealthHub will add care concierges, nurse practitioners, and dietitians to its offerings saving consumers a trip to the hospital and providing a one-stop shop health center.

CVS is rated a Buy in our POWR Ratings system. The company has a Value Grade of A, making it a tantalizing stock to consider. Its forward P/E is only 9.32, and its Price to Sales is only 0.3. Not too bad for a company that has seen fairly stable revenue growth. This leads us to its Stability Grade of B. Not only has the company shown steady growth, but its stock's price has not seen the high volatility that a lot of other stocks have shown over the past year. If you're interested in seeing CVS's Growth, Momentum, Sentiment, and Quality Grades click here.

CVS is ranked #1 in the B-rated Medical – Drug Stores industry. For more top stocks in that industry, make sure to click here.

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TGT shares were unchanged in after-hours trading Thursday. Year-to-date, TGT has gained 5.22%, versus a 2.26% rise in the benchmark S&P 500 index during the same period.



About the Author: David Cohne

David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a Consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers.

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