Stocks to buy

Retail stocks haven’t been lighting the world on fire lately. The SPDR S&P Retail Exchange-Traded Fund (NYSEARCA:XRT) that tracks the sector is flat on the year (down 0.30% since January). Investors and traders seem to be taking a “wait-and-see” approach to retail stocks as the U.S. economy and consumer spending slow in the wake of persistently high inflation and elevated interest rates used to lower it.

Fears of a coming economic recession are also dampening sentiment around retail stocks. This is unfortunate, as many retailers continue to post strong earnings and have shown great resilience both during the Covid-19 pandemic and throughout the current period of uncertainty. Investors might be surprised at just how strong the underlying fundamentals of many retail stocks are right now.

With that said, here are seven retail stocks that are ready for their comeback.

LULU Lululemon $372.22
NKE Nike $116.98
GPS Gap Inc. $7.78
WMT Walmart $149.53
M Macy’s $15.61
DKS Dick’s Sporting Goods $135.46
COST Costco $495.00

Lululemon (LULU)

Source: Richard Frazier / Shutterstock.com

Shares of athletic apparel retailer Lululemon (NASDAQ:LULU) have been on an upswing since the company issued its latest quarterly earnings at the end of March. LULU stock jumped 15% immediately after the report, as the company issued an across the board earnings beat. Accordingly, LULU stock has seen its share price rise 27% since then. After enduring a bruising 2022, Lululemon’s stock has now managed to rise 22% above where it was trading at a year ago.

The company said that strong holiday sales helped it to report earnings per share of $4.40 versus $4.26 that was expected on Wall Street. Revenue in the three months ended January 29 of this year came in at $2.77 billion compared to $2.70 billion that analysts had forecast. Lululemon also issued strong forward guidance, saying it now expects fiscal 2023 revenue of between $9.3 billion and $9.41 billion. That was better than Wall Street consensus expectations of $9.14 billion, according to Refinitiv data. The stock continues to recover.

Nike (NKE)

Source: TY Lim / Shutterstock.com

They haven’t staged a recovery like the one seen in LULU stock, but shares of Nike (NYSE:NKE) appear due for a rebound. The frustrating thing about NKE stock is that it has continued to trend lower, despite a string of earnings beat by the company. Year to date, NKE stock is down 2% and the shares are trading 12% below their 52-week high. This despite the fact that Nike’s latest earnings easily beat Wall Street’s forecasts on both the top and bottom lines.

At the end of March, Nike reported earnings per share of 79 cents versus 55 cents that was expected by analysts who cover the company. Nike’s revenue in the quarter totaled $12.39 billion compared to $11.47 billion that had been forecast.

What seems to be holding the company’s stock down are weak sales in China and bloated inventory levels. Should Nike show improvement in those areas when it next reports earnings on June 28, the stock is likely to pop and finally move higher.

Gap Inc. (GPS)

Source: Shutterstock

Retailer Gap Inc. (NYSE:GPS) has had an extremely difficult time in recent months. The clothing company has seen its share price decline 33% year-to-date after it reported a net loss of $273 million, or 75 cents a share, for the three months ended January 28 of this year. The latest loss was 1,600% bigger than the $16 million the company lost a year earlier. In the wake of the brutal quarter, Gap announced several changes within its executive ranks, and that it plans to close 50 to 55 Gap and Banana Republic retail stores across North America.

The company went onto forecast that it expects fiscal first quarter net sales to decrease in the mid-single digit range compared to a year earlier, and that it anticipates fiscal 2023 net sales to decrease in the low to mid-single digits. While disheartening, there are some bright spots on the horizon. The company reported that its inventory levels declined 21% year-over-year during its most recent quarter. And Gap is expected to soon announce a new permanent CEO to replace Sonia Syngal, who stepped down last summer.

Walmart (WMT)

Source: Jonathan Weiss / Shutterstock.com

Walmart (NYSE:WMT) stock has been treading water over the last year, having risen only 1% over the past 12 months. However, WMT stock could be poised for a breakout when the world’s biggest retailer reports its latest earnings on May 18.

The company is coming off strong sales at the end of 2022, especially during the December holiday season. Additionally, the company’s discount pricing model positions it to perform strongly should the U.S. economy enter a recession this year.

In it previous earnings, Walmart said its revenue and earnings were driven higher by budget-conscious consumers who are visiting its stores in greater numbers, searching for deals as inflation and interest rates remain high. As a result, Walmart reported earnings per share of $1.71 versus the $1.51 that was forecast. Revenue amounted to $164.05 billion, compared to $159.72 billion that was expected among analysts. Looking ahead, the retailer forecast same-store sales for all of this year to rise between 2% and 2.5%.

Walmart is not only the biggest retailer in America, but has also become a grocery powerhouse, which is driving increased foot traffic at its outlets.

Macy’s (M)

Source: Joe Tabacca / Shutterstock.com

Department store chain Macy’s (NYSE:M) is another retail stock that’s down on its luck. So far this year, M stock has decreased 27%. Notably, the company’s share price is also down 56% over five years.

While disappointing, hope arrives for Macy’s shareholders in the form of new management at the company. It was announced at the end of March that CEO Jeff Gennette will retire after more than 40 years at the retailer. Gennette, age 61, plans to step down in February 2024 and will be succeeded by Tony Spring, CEO of the company’s Bloomingdale’s chain.

When Gennette became Macy’s CEO in 2017, he undertook a three-year turnaround strategy called “Polaris” that accelerated Macy’s digital growth, closed underperforming stores, and boosted profits as the company faced mounting competition from online retailers. However, the Covid-19 pandemic undid much of the turnaround strategy, as it forced Macy’s to temporarily close its nearly 800 store locations, and operate at reduced capacity. However, Macy’s today has a smaller workforce and network of stores, along with less debt and more online customers after the pandemic.

Dick’s Sporting Goods (DKS)

Source: Jonathan Weiss / Shutterstock.com

Shares of Dick’s Sporting Goods (NYSE:DKS) has been trending higher since the sporting goods retailer more than doubled its quarterly dividend payment to shareholders in March of this year. The company announced that it will pay a dividend of $1 per share going forward, which is an increase of 105% from the 48.75 cents paid previously. The dividend increase came after Dick’s smashed expectations for its fourth-quarter 2022 earnings.

The company’s same-store sales rose 5.3%, more than double analysts’ consensus forecasts of 2.1% growth, according to Refinitiv data. Additionally, earnings per share came in at $2.93 versus $2.88 that analysts had expected. The retailer said it has kept sales brisk despite inflationary pressures and a slowing economy. The company also said it expects same-store sales growth for the current fiscal year to be flat or up 2%, adding that it has resolved most of its supply chain issues.

Year to date, DKS stock has gained 9%. Dick’s Sporting Goods next reports earnings on May 23.

Costco (COST)

Source: ilzesgimene / Shutterstock.com

Last on this list of retail stocks to buy is another top name that’s been drifting sideways. Over the last year, shares of Costco (NASDAQ:COST) stock have increased a paltry 1%. The best-in-class grocery retailer is definitely due for a breakout. That could come after the company reports earnings on May 25.

Concerns around slowing growth coming out of the pandemic have slowed down the company’s upward stock price momentum. Additionally, Costco’s pricey valuation has turned some investors off. Its price-earnings ratio currently sits at 36-times, which is on the high side.

However, investors and analysts may be overlooking the fact that Costco is a recession-resistant stock, meaning the company’s sales are likely to remain strong even during an economic downturn. Costco’s membership fees also provide it with a reliable income stream and earnings stability in good times and bad. Consumers are also fiercely loyal to Costco as evidenced by the fact that its annual membership renewal rate exceeds 90%. And, consumers have further relied on Costco over the past year for cheaper gasoline than they can get at other service stations.

On the date of publication, Joel Baglole 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.

Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.

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