6 retail stocks that have a chance to overcome Amazon

It is no secret that retail stocks have struggled last year because of the threat Amazon posed to the retail industry. There have been a few retail bankruptcies already in 2017, with more to follow. However, not everything is lost.

According to Seeking Alpha, there are a few retailers that still have a chance to overcome Amazon. They have strong brands and are investing heavily in building their own digital platforms. Moreover, all six stocks pay dividends to shareholders. Let’s see who they are.

  1. Walmart Stores

If there is any retailer with the size and financial strength to compete with Amazon, it is Walmart. As the largest retailer in the world, it has the distribution infrastructure necessary to rapidly expand its e-commerce business. Moreover, Walmart stores are located within 10 miles of approximately 90 per cent of the U.S. population. Its stores can serve an important role as distribution centres, and a way to maintain its brand connection with customers.

Walmart operates three main segments:

  • Walmart International (24 per cent of sales)
  • Walmart U.S. (64 per cent of sales)
  • Sam’s Club (12 per cent of sales)

Walmart.com is now the third most-visited retail site in the U.S. Its global e-commerce sales more than doubled from 2014-2016. This is the result of significant investment, both internally and through acquisition. For example, Walmart acquired e-commerce giant Jet.com for $3.3 billion. It also owns a 10 per cent stake in Chinese e-commerce platform JD.com. This investment has really paid off: Walmart’s e-commerce sales reached $15 billion last fiscal year. E-commerce sales rose 22 per cent for the full year, and the results have been even more impressive in the current fiscal year.

  1. Costco Wholesale

Going to Costco is a unique experience. This retailer operates 732 warehouses, including 510 in the U.S. and Puerto Rico, 95 in Canada, 37 in Mexico, 28 in the U.K., 25 in Japan, 13 in Korea, 13 in Taiwan, eight in Australia, two in Spain, and one in Iceland. Costco’s brand strength has given it a very large and loyal customer base, which is critical to the membership club model.

Costco now has more than 88 million cardholders, and enjoys a 90 per cent renewal rate in the U.S. and Canada. Memberships generate approximately $2.7 billion in revenue for the company, and there is plenty of growth potential left. For example, Costco recently announced a number of pricing increases set to be implemented as of June 1st:

  • $10 annual increase annual fees for Executive Memberships in the U.S. and Canada.
  • $5 annual increase for U.S. and Canada Goldstar individual, Business, and Business add-on members.
  • The maximum annual 2 per cent reward associated with the Executive Membership will increase from $750 to $1,000.

The company’s recently released fiscal third-quarter earnings easily topped analyst expectations. Revenue rose 7.8 per cent year over year, and beat forecasts by $320 million. Comparable sales growth is accelerating; comps were up 3 per cent in the first three quarters combined, including 5 per cent growth in the most recent quarter.

Online is a growing part of the business, which is to be expected. One specific area Costco is targeting within e-commerce is grocery. Costco recently announced a partnership with grocery delivery service Shipt. The partnership will initially launch in Tampa, Florida, with plans to expand into 50 markets by the end of 2017.

  1. Home Depot

Home Depot is Amazon-proof because of its business model. It is the largest home-improvement retailer. Home Depot operates 2,281 retail stores in all 50 U.S. states, Puerto Rico, the U.S. Virgin Islands, Guam, Canada, and Mexico. The products it sells are not easily sold and delivered online. Moreover, home repairs are a more complicated arena in general, and do-it-yourselfers value the ability to see products in person and ask questions to qualified staff.

Home Depot does have an online presence, and its brand reputation and rewards program help cement its relationship with its customers. Home Depot’s online sales grew approximately 23 per cent last quarter.

The company has increased its dividend at double-digit rates consistently going back several years. Home Depot isn’t a high-yielder, but it does slightly exceed the S&P 500 average yield. And, Home Depot is a huge dividend growth company. It nearly quadrupled its dividend between 2010 and 2017. Future dividend increases are likely to remain in the double-digit range. Not only will earnings-per-share continue to grow, but Home Depot also increased its target dividend payout ratio, from 50 per cent to 55 per cent going forward.

  1. Target

Target rounds out the ‘Big 3’ discount retailers that can withstand Amazon’s onslaught. All three have the size and scale to build significant online businesses. And, the added advantage for Walmart, Costco, and Target, is that they can offer delivery from existing stores. In this way, their massive store counts are actually an advantage, which explains why Amazon has begun to open its own brick-and-mortar stores.

More than 40 per cent of Target’s digital channel sales volume already runs through its stores. Last holiday shopping season, this number was at 80 per cent. Target can offer order pickup and it can also ship directly from its stores. This allows for better fulfillment-approximately 95 per cent of in-store pick up orders were ready in an hour or less last quarter.

Target has a large and growing online presence. Separately, Target is investing in new store initiatives, such as small stores that will be positioned near large cities and college campuses, locations which already have high foot traffic. These small stores are called CityTarget and TargetExpress.

Target shareholders are paid well to wait for the turnaround to materialize. Like Walmart, Target is a Dividend Aristocrat. It has increased its dividend for 45 consecutive years. It should continue to increase its dividend even through the current downturn, thanks to its highly profitable business model. Plus, income investors now have the opportunity to scoop up shares of Target at a 4.4 per cent dividend yield.

  1. Best Buy

The most recent earnings report of Best Buy smashed through analyst expectations. On May 25th, Best Buy announced earnings of $0.60 per share. Analysts were only expecting $0.40 per share, which means Best Buy beat expectations by 50 per cent.

Revenue beat expectations by $220 million, as the company generated a surprise increase in comparable sales. Company-wide comparable sales increased 1.6 per cent. In the same quarter last year, comparable sales fell 0.1 per cent, and analysts were expecting another decline. Best Buy’s adjusted earnings-per-share rose 40 per cent year over year for the quarter.

After reporting its massive beat, Best Buy shares rose 11 per cent in pre-market trading. By midday, the stock was up 22 per cent.

Best Buy embraced online retail, by investing heavily in building its digital platform. This has paid off; last quarter, digital sales rose 22 per cent. In fiscal 2017, Best Buy’s online sales increased 21 per cent. This has helped keep Best Buy’s comparable sales in positive territory. Last fiscal year, comparable sales increased 0.3 per cent. The online platform is steadily becoming a bigger piece of the overall business.

The company generates a lot of cash flow and is committed to returning a significant amount of it to shareholders. In 2017, it raised its dividend by a whopping 21 per cent. At the same time, it also upped its share repurchase authorization by $3 billion. This is a huge repurchase, which represents nearly 20 per cent of Best Buy’s market capitalization. As a result, earnings growth will be significantly accelerated with such an aggressive share buyback.

  1. L Brands

L Brands is an international speciality retailer, with more than 3,000 company-owned stores in the U.S., Canada, the U.K., and China. Its products are also sold in 1,000 additional franchised stores. It has two core brands, which drive the business:

  • Bath & Body Works (31 per cent of 2016 sales)
  • Victoria’s Secret (62 per cent of 2016 sales)
  • Other (1 per cent of 2016 sales)

The ‘Other’ category includes the La Senza and Henri Bendel banners.

L Brands has a heavy presence in malls, which makes it a prime example of the type of retailer Amazon is putting out of business. But L Brands has a fighting chance against Amazon, because of its brand differentiation. Victoria’s Secret retains a great deal of brand equity, particularly when it comes to younger generations.

Direct-to-consumer sales have increased significantly over the past several years. Last year, the company generated more than $2 billion of direct-to-consumer sales across its two major brands.

L Brands’ earnings more than cover its dividend of $2.40 per share. L Brands has a very high dividend yield and a long track record of steady dividends. It has paid dividends for more than 40 years. If the stock price falls to $48, the dividend yield will eclipse 5 per cent, and L Brands will join the list of 295 stocks with an established 5 per cent + dividend yield.

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