Stock investors seeking safety amid a period of heightened market volatility may be wise to take a closer look at a few traditional retailers. While retailers have reiterated or lifted their guidance towards year-end, their stocks have pulled back in Q4, making them attractive for value-seeking investors, according to analysts at Cowen & Co, per Barron’s.
Retail Drops Off in Q4
In a recent note, Cowen analyst Oliver Chen highlighted Target Corp. (TGT), Kohl's Corp. (KSS) and Ulta Beauty Inc. (ULTA) as retail stocks he views as best positioned to outperform their peers. While the retail industry faces headwinds including difficult comparisons with 2017’s holiday quarter, margin pressure and concerns regarding weaker consumer strength, Chen is upbeat on historically low unemployment and strong wage growth.
Further, he views these three brick-and-mortar companies as fit to maintain their market share in the new e-commerce era dominated by Amazon.com Inc. (AMZN).
While all three stocks have beaten the broader market’s returns year-to-date (YTD), they have dropped off significantly towards the close of 2018. In the recent three-month period, Target shares have fallen 23.3%, Ulta 10.2%, and Kohl’s 23.6%, versus a 9.9% loss for the S&P 500. Target trades at a price to earnings ratio around 11.2 times, compared to 23.1 for Ulta, 10.2 for Kohl's and 21.3 for the average S&P 500 company.
“We believe investors are looking for defensive, less-cyclical, consumer staple-type opportunities as relatively safer places to hide in this time of geopolitical and economic volatility and uncertainty,” Chen wrote. “We like these three stocks given the strong underlying consumer, not easily replicable product assortments, digital investments and innovation."
Target to Rally Near 50%
Target, whose shares are up 3.4% YTD versus the S&P 500’s 2.1% dip, could see its stock jump a whopping 48% over 12 months to reach a target of $100, according to Chen. He views Target’s sell-off as “overdone,” presenting an opportunity for investors to buy on the dip.
“We have conviction management’s investment plans are gaining traction with shoppers and we anticipate continued physical and digital momentum,” wrote Chen.
Since announcing restructuring efforts in early 2017, Target has doubled down on initiatives such as in-store fulfillment and curbside pickup in key locations, as well as targeting affluent, urban markets and investing in its digital channels.
Kohl’s to Capitalize on Retail Dislocation
Chen applauded discount retailer Kohl’s for its strategic initiatives such as a “best-in-class loyalty program,” a pilot to synthesize and integrate rewards, and innovative partnerships with Amazon. Kohl’s is also “leaning into trend-right active categories and improving the women’s assortment,” wrote Chen, who views the retailer’s off-mall presence and dynamic transformation of its real estate profile as other differentiators. Thanks to Kohl’s swiftness to move on the offensive against retail disruption, Cowen views the firm as “well positioned to capitalize on retail dislocation.”
Cowen’s $82 price target on Kohl’s shares implies a near 34% upside from Friday morning.
Cosmetics Industry Pick
Earlier this week, Ulta Beauty reported impressive sales, comps and earnings growth in the third quarter, and confirmed full year 2018 guidance. The stock's ugly sell-off following its solid results reflect the bearish sentiment for retail at the moment, in which which investors are concerned about peaking margins and falling consumer sentiment.
In light of Ulta Beauty's successful omnichannel strategy and the continued strength of the consumer, Cowen sees Ulta Beauty as a bargain buy in a depressed retail environment.
Chen views Ulta Beauty as best positioned to outperform its peers in the increasingly competitive cosmetics, fragrance and skincare space. He cited the Bolingbrook, IL-based company’s "dominant and data-informed loyalty program" with 30.6 million users strong, alongside a unique “mass-tige” assortment, and superior vendor relationships.
His $340 12-month price forecast for ULTA shares implies a 36.7% upside from current levels.
What’s Next for Retail
Moving forward, as long as broader market uncertainty looms and the consumer stays strong, investors may be smart to hide out in retail stocks. That being said, any pullback in the consumer could result in a stampede out of the sector. Within the sector itself, investors could hedge against e-commerce disruption by choosing companies that have promising digital businesses, and other differentiators like loyalty programs and strategic partnerships.