The market is not in a good place right now. There are stocks that are working and many that are not, and inflation is soaring. Retail stocks aren’t leading the pack, but they are doing better than most. However, they also have unique headwinds to push through as well.
Inflation remains stubbornly high, and soon the Federal Reserve will start raising interest rates. Inflation affects everything from commodity prices to the price of beef at the supermarket.
For retail stocks, investors have to navigate a difficult stock market environment. That includes big swoons in the indices as geopolitical tensions keep the Volatility Index above $30.
There’s a trader/investor that I respect quite a bit, and he keeps telling me, “Bret, the market is very disjointed right now.” This trader spent almost 40 years on the Chicago trading floor, so when he calls, I answer the phone.
The market is disjointed right now and it makes things very difficult. In any regard, some retail stocks are shining through, trading well after reporting strong earnings. Let’s look at some of them right now.
- Walmart (NYSE:WMT)
- Costco (NASDAQ:COST)
- Kroger (NYSE:KR)
- Best Buy (NYSE:BBY)
- Target (NYSE:TGT)
- Lowe’s (NYSE:LOW)
- Kohl’s (NYSE:KSS)
Winning Retail Stocks: Walmart (WMT)
Considered by many to be the king of retail stocks, Walmart weighs in as a behemoth. The company sports a market capitalization of roughly $400 billion, making it one of the largest companies in the United States. That’s a pretty big observation, given we have some companies with a $1 trillion valuation.
In any regard, Walmart popped about 4% on Feb. 17 after reporting solid quarterly results. While the market-wide volatility eventually erased those earnings gains, Walmart stock has since rallied above the post-earnings high, now up 7% from its pre-earnings price.
Can the gains continue?
If the gains don’t keep coming, it’s more likely to be related to the current market environment than anything specific about Walmart.
Despite supply chain turmoil, Walmart navigated the mess pretty well. It beat on earnings and revenue expectations, gave a modest boost to its dividend, and reported comp-store sales growth of 5.6%.
The company sees solid growth this year and plans for a $10 billion buyback plan. One takeaway was quite good: “Notably, consolidated operating expenses as a percentage of net sales was relatively flat compared to a year ago as WMT navigated higher supply chain costs and pandemic-related challenges well.”
Walmart kicked things off a few weeks ago and put a good feeling out there for retail stocks. However, Costco was one of the more recent retail stocks to report its quarterly results.
Although the stock fell 1.4% on March 4, the day after reporting, it should still have bulls’ attention.
First, the stock had been on fire prior to that report. Shares were up six days in a row and rallied more than 10%. Second, it held a large number of key levels on the dip. In other words, bulls bought the dip and support continues to hold after earnings and after a strong run in the stock price.
Second, the results were pretty good!
Costco beat on earnings and revenue results, with the latter beating expectations by almost $400 million after growing ~16% year over year. Comp-store sales impressed, while management is discussing raising membership fees. That would be the first time since 2017.
Winning Retail Stocks: Kroger (KR)
Look at the way Kroger has come to life. From the Feb. 24 low — the low for many stocks, including the major US indices — shares of Kroger are up more than 27% and were up 41% at their peak.
That’s one heck of a gain in just a couple weeks, even besting the 32% rally Kroger stock enjoyed at the start of the 2020 Covid-19 meltdown. While more upside may be on the way, taking some profit wouldn’t be the worst idea at this point.
It allows investors to put some profit in their pocket and gives them added flexibility. That’s flexibility to ride Kroger stock for more upside, while also giving them the ability to buy the dip when it comes.
So what sparked such a rally? First, the company beat on revenue and smashed earnings expectations. Even better, earnings guidance came in ahead of estimates, while operating income continues to fly higher.
The takeaway here? Retail stocks that are fighting off the impact of inflation are seeing huge demand by shareholders.
For Kroger, the company “remains committed to delivering total shareholder returns of 8% to 11% over time.” That’s the company’s strategy of “Leading with Fresh and Accelerating with Digital.”
Best Buy (BBY)
Best Buy showed up to wow investors when it reported earnings on the morning of March 3. Shares jumped more than 9% despite the company reporting a mild earnings beat and missing on revenue expectations.
Revenue slipped 3.4% year over year, a miss from expectations.
So how in the world did this stock rally?
The fact that the company didn’t completely whiff on the quarter was a relief for investors. Worries were high as rising costs and inventory were on shaky ground given the market-wide issues we’re seeing in global supply chains. However, management suggested that the “pandemic trends may prove sticky with consumers.”
Of course, it helped that Best Buy raised its dividend by 26% and announced a new $5 billion buyback plan, which is quite significant given its $24 billion market cap. It now yields about 3.5%.
Winning Retail Stocks: Target (TGT)
Through the ups and downs of the market, Target has become a stock investors can call a go-to holding. The stock was getting thrashed before it reported earnings, but it’s held up incredibly well since issuing its fourth-quarter results.
Target stock fell to a new multi-month low on Feb. 24, down 32% from its 52-week high. Then it rallied 9% over three days ahead of earnings, then bolted higher by 13% on the day of earnings.
In all, shares are up 17% from the low but still remain 20% off the 52-week high.
The company reported a mixed fourth-quarter result, beating on earnings and missing on revenue estimates. For what it’s worth, those reports show that margins remained intact and that costs did not eat away at the bottom line. It’s one reason investors are giving retail stocks a pass when they miss on revenue.
But it was CEO Brian Cornell’s other comments that investors were really gobbling up. He said, “We are a growth company and we’ll continue to grow in 2022 and beyond,” adding that the retailer will look to leverage efficiencies in its business.
This helped too: “We’re just going to be a company that’s investing in the future, investing in growth, but we’ll reward shareholders along the way.”
On Feb. 22, Home Depot (NYSE:HD) reported disappointing quarterly results. The stock fell almost 9% in one day as a result and went on to lose almost 14% at the three-day low after earnings.
The results also weighed on Lowe’s, which reported a day later on Feb. 23. However, Lowe’s stock had the opposite reaction that Home Depot’s had, rallying after the company beat on top- and bottom-line estimates.
Gross margins improved 115 basis points year over year, something that surprised investors given the pressure others are seeing on their businesses. Further, management provided better-than-expected full-year guidance for both earnings and revenue.
Lowe’s management spoke favorably about the long-term housing trends and what it would mean for home improvement stores going forward. Essentially, an aging housing market and work-from-home trends should continue to drive demand going forward.
Winning Retail Stocks: Kohl’s (KSS)
Last but not least, we’re wrapping up with a department store. Kohl’s stock only rallied slightly on the day it reported earnings, gaining just 2%. However, it had a wide range, moving higher and lower on the day — indicating some indecision that resolved to the upside.
Even though earnings are forecast to slip a bit this year, investors are confident with the company as shares trade at around 8 times this year’s earnings forecasts.
It also helps that the stock pays out a 3.8% dividend yield.
That dividend was a focus on March 1, when the company reported earnings. The quarter was slightly mixed, although earnings beat expectations and revenues were just a hair under estimates.
However, the return to shareholders is what impressed investors the most. The company doubled its dividend payout, while also announcing a $1 billion repurchase plan. For a company that has a market cap of $7.5 billion, a $1 billion buyback is significant.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.