Leading Retail Shares to Watch in 2025
Many individuals invest in retail stocks due to the allure of purchasing shares in businesses they frequently patronize. Despite your affection for a particular store, however, it may not be the wisest investment option for your portfolio.
To describe the retail industry's recent challenges as tumultuous would be an understatement. The COVID-19 pandemic saw a surge in e-commerce sales and the demand for certain goods, as consumers refrained from visiting physical stores. Retailers struggled to keep up with consumer demand and overcame supply chain constraints for a considerable period. Post-pandemic, inflation skyrocketed to record highs of 40 years.
However, with the pandemic now behind us and inflation gradually cooling down, the retail landscape has stabilized. This might be an opportune moment to conduct a more detailed examination. Let's explore some of the leading retail stocks and factors to consider when investing in retail companies.
Four prominent retail players
Several publicly traded retailers have ascended to the throne of their sectors:
1. Amazon
As the monarch of e-commerce retail, Amazon (AMZN 1.35%) commenced its journey by selling books and later inaugurated an online platform enabling the buying and selling of various items. Amazon's acquisition of Whole Foods Market provided it with a ready-made network of physical stores to engage customers further.
Brick-and-Mortar
Brick-and-mortar encompasses physical establishments with a physical presence, as opposed to digital or online enterprises. Amazon witnessed a surge in demand during the COVID-19 pandemic, with online shopping gaining traction. As a result, Amazon expanded its capacity aggressively, only to subsequently focus on boosting productivity and reducing expenses. CEO Andy Jassy has achieved impressive profits, and the company's bottom line has recovered noticeably.
With its expansive scale, Amazon is poised to dominate the e-commerce market in the long run. Smaller competitors have struggled to cope with escalating supply chain costs due to their lack of Amazon's scale and logistical prowess. Additionally, Amazon boasts a highly profitable cloud computing business (AWS) to bolster its bottom line.
2. Home Depot
Home Depot, the legendary home improvement retailer, is synonymous with its large warehouse stores and extensive inventory. Catering to both DIY homeowners and professional contractors, Home Depot (HD 0.76%) consistently records growth in sales and earnings. Home Depot has bolstered its online presence while maintaining an advantageous position against potential competitors.
Home Depot's sales growth has slowed due to a decrease in consumer spending after years of robust demand for renovation and remodeling projects during the pandemic. Consumers continue to spend on smaller projects, but spending in the premium categories is waning.
Rising interest rates are exacerbating the slump, as they reduce household spending power and hinder tapping into home equity to finance costly projects. However, in the long term, the company possesses significant growth opportunities within a fragmented industry.
3. Lululemon Athletica
Lululemon Athletica, a trailblazer in athletic apparel, originally focused on producing yoga clothing. The company has gradually expanded its customer base to individuals seeking comfortable and stylish clothing for fitness activities.
Recent performance has been robust in a challenging economic climate, with sales climbing by 9% year over year in the last quarter, marked by impressive 33% international growth. Lululemon's gross margin and adjusted operating margin expanded by 150 basis points and 70 basis points, respectively.
The popularity of athleisure has staying power, and Lululemon outpaces its competitors in the industry. The retailer is poised to achieve its goal of attaining annual sales of $12.5 billion by 2026 and continuing to grow. This expansion will be driven by expanding men's clothing, intensifying direct-to-consumer sales, and furthering its global expansion.
Though a recession might impede Lululemon's growth agenda, the retailer has remained relatively unscathed by high inflation, elevated interest rates, and investor skepticism. This resilience underscores Lululemon's strong brand consciousness.
4. Ulta Beauty
Ulta Beauty, tapping into the trend of providing captivating in-store experiences, offers beauty salon treatments to its customers. The concept has gained traction, with its stores attracting customers prior to the pandemic's onset.
Ulta's sales continue to be robust in a challenging environment for discretionary spending, with net sales growing by approximately 2% year over year in the latest quarter. The growth was primarily attributable to new stores, while comparable sales remained almost stable.
Total revenue is projected to exceed $11 billion by 2024, according to the company's guidance, while an operating margin in the mid-teens attests to the success of the Ulta model. A recession would likely adversely impact sales and profits in the short term, but Ulta's long-term growth potential remains strong.
With this in mind, Ulta could thrive as inflation gradually subsides and interest rates decline. Management seems optimistic about the stock's worth and anticipates roughly $1 billion in share repurchases alone in 2023.
Identifying the top retail stocks
Discerning high-quality retail companies involves considering some crucial aspects of their retail operations. The most robust retailers excel based on these core metrics:
Sales growth
The top retail companies consistently enhance the income they generate from the merchandise they sell. Retailers can boost sales by establishing additional stores in new locations and by improving sales at existing stores.
Income
Income is a business's total earnings or the sum of money it earns from regular operations before expenditures are accounted for. Same-store sales, or comparable-store sales, is a retail-specific income metric that evaluates income growth for stores in operation for at least a year. The best retailers produce impressive same-store sales numbers and substantial overall income growth.
Earnings growth
A retailer can generate income but remain unprofitable. Most retailers can reduce prices or offer promotions to entice more customers to purchase more items, but if their prices are too low, they lose money on each sale.
The leading retail companies have devoted customers willing to pay high prices, and these businesses can also reduce expenses to maximize profits. Investors should be cautious about purchasing shares in retailers that struggle to increase their earnings, measured by absolute values and earnings per share.
Performance during critical periods of the year
A significant portion of the retail business is seasonal, and many retailers conduct a large portion of their annual business during the holiday season in November and December. Strong holiday sales can compensate for weaker business conditions at other times of the year. Many retailers also provide appealing promotions to shoppers during the holidays to further boost their seasonal sales.
Although the end of the calendar year is typically the high season for retailers, it's not the only one. For instance, retailers focused on younger shoppers generally see significant sales spikes during the back-to-school season.
Analyzing sales trends can help you determine the extent to which a retail company is seasonal. Strong performance by a retailer during a crucial season can indicate that the company is outperforming its rivals.
Size of store network and property holdings
In addition to knowing a retailer's number of stores and its locations, investors can pay attention to retailers' property holdings. Retailers that maintain networks of physical stores may have extensive property assets.
Maintaining and improving stores can be expensive, but the retail floor, backrooms, and other spaces retailers own or lease have value. Even when a company's retail operations aren't particularly profitable, the value of its underlying property can account for a substantial portion of the company's overall worth.
Investors can also evaluate how efficiently a retail company uses its property. Calculating metrics such as sales per square foot can indicate how profitably a retailer leverages the space it owns to sell its products.
Strength of e-commerce sales
Previously, retail companies either had physical stores or sold their goods online, rarely both. Today, many companies have both e-commerce portals and brick-and-mortar locations.
As e-commerce has become increasingly popular, many retailers' online sales have grown much faster than their overall sales. The best retailers use their presence in stores to their advantage by offering services such as in-store pickup and local delivery. Retail businesses without a strong online presence will likely have increasing difficulty competing with their peers.
Balance sheet strength
When considering investing in a retailer, look for a substantial cash reserve and manageable debt on its balance sheet. The pandemic caused steep sales declines and significant losses for parts of the retail sector, and retail businesses that were financially fragile before the crisis have not fared well. Major retailers, such as JCPenney and Neiman Marcus, were forced to declare bankruptcy, unable to cope with the sudden drop in demand for in-person shopping.
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FAQ
Investing in retail stocks FAQ
What is the best retail stock?
Amazon has grown into a powerful force in the retail industry. The company's vast scale, extensive logistics network, and popular Prime membership program make it tough to beat.
What are retail stocks?
Retail stocks are stocks of companies that sell goods to customers in stores, online, or both.
What is a publicly traded retailer?
A publicly traded retailer is a retail company with shares listed on a major public stock exchange. When a retailer is publicly traded, shares can be bought and sold by investors.
Is investing in retail good?
The retail industry is vital, but not all retailers are equal. When considering investing in a retail stock, look for those with competitive advantages, such as a strong brand or economies of scale.
While the retail landscape has undergone significant changes, some retail stocks continue to be attractive investment options. For instance, Amazon, as the leader in e-commerce, has consistently grown its income and earnings, with its acquisition of Whole Foods Market providing a strong physical presence. Home Depot, another robust retailer, has recorded robust sales growth and bolstered its online presence, standing out in a fragmented industry.
Investors should also consider the performance of retailers during critical periods, as proven by Ulta Beauty's strong sales even in challenging economic conditions. Additionally, analyzing sales trends, store network size, e-commerce sales, and balance sheet strength can provide valuable insights when evaluating retail stocks for investment.
