The U.S. is a nation of shoppers. Whether we’re fighting (literally) over Tickle Me Elmos or hunting for toilet paper, we love to spend—to the point that our sprees account for some 70% of the economy. Yet in recent years, retail has been one of the most brutal sectors to be in—both for investors and the companies themselves—making it difficult to pick winners. Targeting growing, cash-rich brands is one strategy.
The stakes are certainly high: Retail sales had their biggest jump in history in May, proving that even a global deadly pandemic can’t keep customers from splurging. And, it wasn’t just panic buying of essentials—or even people sprucing up their homes as they prepared to spend more time there, though there certainly was some of that. Shoppers also snapped up apparel too—talk about all dressed up and nowhere to go.
So a layperson might think it is a great time to be a retailer, but of course any investor that has been paying attention in recent years knows that isn’t true. The rise of Amazon.com (AMZN) upended the industry, a process that rattled big and small players alike and caused plenty of bankruptcies and store closings.
The coronavirus pandemic simply accelerated the shift to e-commerce that was already under way, and exacerbated the gap between the retail haves and have-nots. Companies that were already gaining momentum in many cases are holding up best during the crisis. For instance, those with plenty of cash on hand were able to shrug off liquidity concerns and spend on upgrading their all-important online presence and omnichannel platform.
Therefore, Barron’s screened for retailers in the S&P 500 (.SPX) that could score well on these metrics. We ranked companies on one-year sales growth as well as free cash flow per share, and looked for which companies landed in the top 10 list for both metrics. (We excluded Amazon, since it is in a class of its own, and CVS Health (CVS) to focus on pure-play retailers.)
The sales growth side was dominated by discounters—showing that even with high spending, shoppers are focused on value, a trend we’ve noted for some time. Yet only three were able to top both lists: Costco Wholesale (COST), O’Reilly Automotive (ORLY), and Ulta Beauty (ULTA).
Costco and other stores selling essentials have done well during the pandemic. Costco reported better-than-expected fiscal first-quarter earnings and strong May sales. In addition, in 2019, Barron’s named its CEO one of the world’s best.
O’Reilly also looks well positioned post-Covid. Yes, driving (and car-related stocks) took a nosedive as employees worked remotely and leisure destinations closed during stay-at-home orders. But Americans are back on the road, even as economic uncertainty could mean they are more likely to fix up their old cars than spring for a new one. And if some people do permanently leave cities in the future, they will likely need more cars and car repairs.
At first blush, Ulta doesn’t fit the mold, and its recent earnings report was a disappointment. Yet it has a robust balance sheet and strong online presence. It could also benefit from pent-up demand. After all, rivals have seen continued strength despite the pandemic, and consumers have been willing to spend on skin and hair care as they focus on health and wellness.
Speaking of that, CVS is still worth a mention. Yes, it isn’t a pure-play retailer, and even includes prescriptions and patient care in its retail segment when it reports results. But it also made the cut for both lists—it ranked first in one-year sales growth and seventh in free cash flow per share. And CVS stock is the second cheapest of the group, behind only Walgreens Boots Alliance (WBA).
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