5 Retail Stocks to Consider Adding to Your Potfolio 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 – Get Rating) and Target (TGT – Get Rating), 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 – Get Rating), grocery stores like Albertsons (ACI), and wholesale clubs like Costco (COST – Get Rating). 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 – Get Rating) and CVS Health (CVS – Get Rating), 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 – Get Rating)

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 – Get Rating)

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…

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