10 Best Retail Stocks to Buy Now

In this article, we will discuss the 10 best retail stocks to buy now.

Due to macroeconomic uncertainty, some of the leading retail stocks have taken a beating this year. Inflation is still very high, as the Department of Labor revealed that the consumer price index (CPI) for October 2022 increased by 7.7% year-over-year (YoY). On a month-over-month (MoM) basis, the CPI rose by 0.4%. Inflation rose to 9% in June and is still hovering around a four-decade high. To combat raging inflation, the Federal Reserve has increased the benchmark interest rates on five occasions since March 2022. The cumulative increase during this period has been three percentage points (ppts) as the benchmark interest rate is in a range of 3% to 3.25%. The benchmark interest rates are at their highest level since 2008. The retail sector is not only facing headwinds in the form of raging inflation and rising interest rates, but the supply chain disruptions and rising inventories have also cast doubts on the growth prospects of the retail sector.

However, analysts remain bullish on the long-term outlook of the retail sector and expect the best retail stocks to bounce back during the holiday season. The National Retail Federation anticipates the annual retail sales to observe a 6-8% growth to reach $4.86 trillion in 2022. Meanwhile, the year-over-year online and non-store sales are projected to rise by 11-13% to meet the target of $1.17 trillion. Halloween spending is also expected to recover back to the pre-pandemic level of $10.6 billion this year, compared to $10.1 billion in 2021. Interestingly, Americans spent $2.9 billion on Halloween costumes in 2022, which was the highest spending for this category since 2017. Consumer sentiment has begun to improve, and retailers have prepared themselves accordingly to match the increase in demand. American consumers are expected to increase Christmas spending by 4% YoY to $916.4 billion in 2022, up from $881.2 billion in 2021.

Many companies, such as Amazon.com, Inc. (NASDAQ:AMZN), The Home Depot, Inc. (NYSE:HD), and Walmart Inc. (NYSE:WMT), are making use of aggressive pricing policies and discounts to capture greater market share. According to a survey conducted by 4Over comprising 1,000 respondents, six out of 10 consumers are concerned about buying holiday gifts this year due to inflation. Hence, market penetration policies are expected to encourage sales during the holiday season.

Photo by Franki Chamaki on Unsplash

Our Methodology

We have looked at the business fundamentals and expansion plans of these companies. Analysts also have a bullish outlook on these stocks, as reflected by the assigned ratings. These companies are expected to capitalize on the emerging trends in the retail industry, providing upside to investors in the long run. We have ranked these stocks according to the level of hedge fund ownership as of Q3 2022.

10 Best Retail Stocks to Buy Now

10. Big Lots, Inc. (NYSE:BIG)

Number of Hedge Fund Holders: 14

Big Lots, Inc. (NYSE:BIG) is a Columbus, Ohio-based discount home retailer with a presence in 48 states through 1,450 stores focused on selling décor, food, and furniture.

The company is expanding its presence in the e-commerce segment and gearing up for the holiday season by partnering up with DoorDash, Inc. (NYSE:DASH). Under the partnership, DoorDash will fulfill on-demand order requests for all homecare and essential products to the customers’ doorstep. The offerings of DoorDash are now present on DashPass, which is a popular membership program that rolls out limited-time discount promotions on online orders. Big Lots, Inc. (NYSE:BIG) is expected to reach normalized stock levels by Q4 2022 as it is focusing on promotional activities to liquidate excess stock.

Big Lots, Inc. (NYSE:BIG) also offers an attractive forward dividend yield of 6.73% as of November 18. Any positive update related to the holiday sales could take the stock on a bull run, making it one of the best retail stocks to buy now.

9. Levi Strauss & Co. (NYSE:LEVI)

Number of Hedge Fund Holders: 20

Levi Strauss & Co. (NYSE:LEVI) is a San Francisco, California-based apparel company.

In a research note issued on October 10, Paul Lejuez at Citi gave Levi Strauss & Co. (NYSE:LEVI) stock a Buy rating with a target price of $19. Although the company missed the Q3 2022 revenue forecast of $1.58 billion by $80 million, it was able to surpass the adjusted EPS forecast of $0.37 by three cents. The revenue miss was primarily driven by the foreign exchange headwinds as the US dollar gained strength against leading global currencies.

Lejuez has selected Levi Strauss & Co. (NYSE:LEVI) as one of the best retail stocks due to the relative strength of the brand and its visibility across the globe. Analysts think Levi Strauss & Co. (NYSE:LEVI) has a healthy balance sheet, which would allow the company to weather macroeconomic headwinds. The company is well-positioned to continue gaining market share. Levi Strauss & Co. (NYSE:LEVI) has an annual forward dividend yield of 3.06% as of November 18.

Royce & Associates held over a million shares in Levi Strauss & Co. (NYSE:LEVI) during the third quarter of 2022.

8. Foot Locker, Inc. (NYSE:FL)

Number of Hedge Fund Holders: 24

Foot Locker, Inc. (NYSE:FL) is a New York-based footwear retail company with a presence across 28 countries through its 2,800 retail stores. The company is a youth-centric brand that focuses on sneakers and other casual footwear categories.

Trends like the casualization of workwear are expected to play in favor of Foot Locker, Inc. (NYSE:FL) and provide it with new growth avenues. The company is also working on transitioning into an off-mall large store format category. Foot Locker, Inc. (NYSE:FL) plans to position itself as a multi-brand footwear store. The appointment of ex-Ulta Beauty, Inc.’s (NASDAQ:ULTA) CEO Mary Dillon as the company’s new CEO is also expected to take Foot Locker, Inc. (NYSE:FL) in a new direction. During her eight years at Ulta Beauty, Dillon doubled revenues and reinvented the business to become a top Fortune 500 retailer. Under the new leadership, Foot Locker, Inc. (NYSE:FL) is expected to emerge as one of the best retail stocks to own.

Miller Value Partners shared its bullish stance on Foot Locker, Inc. (NYSE:FL) in its Q1 2022 investor letter. Here’s what the firm said:

“Finally, Foot Locker (NYSE:FL) came under significant pressure during the quarter, with the stock down more than 50% from its highs and valuation not far from early 2020 lows. Nike continues to place a greater focus on their Direct-to-Consumer business, which will decrease their contribution to Foot Locker’s total sales, retreating to historical averages of 50% by 2023. While a near-term headwind to sales, management plans to offset the lost business by expanding distribution to other leading brands, rolling out larger neighborhood free-standing stores, and expanding two new growth banners (WSS & Atmos). WSS stores will provide an off-mall presence and focus on the rapidly growing and underserved Hispanic market. Atmos will provide Foot Locker with the ability to expand into Japan and Asia sneaker market with their digitally led business model. These new growth concepts have a combined potential to add more than $1B in sales by 2024. The company’s balance sheet remains very strong with $800M in cash and management is increasing returns to shareholders through raising the dividend by 40% and announcing a $1.2B share buyback (more than 40% of the float at current share prices). With the next 12 to 18 months as a transition period for the company, the share price weakness provides attractive reward/risk investment potential, near 3x Enterprise Value/Earnings Before Income, Taxes, Depreciation, and Amortization (EV/EBITDA), and close to a 30% normalized free cash flow yield.”

7. Macy’s, Inc. (NYSE:M)

Number of Hedge Fund Holders: 31

Macy’s, Inc. (NYSE:M) is a New York-based high-end department store brand with a headcount of over 90,000 employees and a footprint of 725 stores. The company offers a diverse range of products ranging from apparel for men, women, and children to consumer goods, cosmetics, and home furnishings.

Macy’s, Inc. (NYSE:M) stock price has observed a significant drop due to inflation, interest rate hike, and supply chain-related concerns. However, experts think the dip provides an attractive opportunity to go long on the stock. The real estate value of Macy’s, Inc. (NYSE:M) is higher than the company’s enterprise value, offering significant downside protection.

Macy’s, Inc. (NYSE:M) has worked on better inventory and markdown management mechanisms and lowered the cost of fulfilling e-commerce orders. These developments are expected to aid Macy’s, Inc. (NYSE:M) in maintaining its gross profit margins in a difficult macroeconomic environment. Furthermore, the company is also working on creating new partnerships with brands to diversify its offerings and increase store footfall. Macy’s, Inc. (NYSE:M) has a share repurchase authorization of $1.4 billion and offers an annual forward dividend yield of 2.83% as of November 18.

6. Capri Holdings Limited (NYSE:CPRI)

Number of Hedge Fund Holders: 44

Capri Holdings Limited (NYSE:CPRI) is a New York-based holding company with a portfolio of global fashion luxury brands such as Jimmy Choo, Michael Kors, and Versace.

Since it acquired Versace in 2019, Capri Holdings Limited (NYSE:CPRI) has been able to increase its top line from $900 million in 2019 to $2 billion as of 2022 through its presence in 300 locations. In a research note issued on September 16, Matthew Boss at JPMorgan increased the target price for Capri Holdings Limited (NYSE:CPRI) from $65 to $72 and reiterated an Overweight rating on the stock. In the past, luxury brands have done well during recessions as demand from the affluent segment remained relatively unimpacted. According to Bain, from 2021 through 2025, the luxury market is anticipated to expand at a compound annual growth rate (CAGR) of 6-8%.

During Q1 FY23, Capri Holdings Limited (NYSE:CPRI) showed revenue growth and kept its operating costs under control. In comparison to the previous year, Capri Holdings Limited (NYSE:CPRI) added almost 12 million additional names to its database in terms of client acquisition. This represents the highest year-over-year growth in the company’s history, highlighting the power and appeal of its brands.

Besides Capri Holdings Limited (NYSE:CPRI), Amazon.com, Inc. (NASDAQ:AMZN), and The Home Depot, Inc. (NYSE:HD), Walmart Inc. (NYSE:WMT) is also one of the leading retail companies in the market.

5. The TJX Companies, Inc. (NYSE:TJX)

Number of Hedge Fund Holders: 55

The TJX Companies, Inc. (NYSE:TJX) is a Framingham, Massachusetts-based off-brand department store brand. The company has emerged as one of the best retail stocks in the recent past.

On October 25, Kimberly Greenberger at Morgan Stanley increased the price target on The TJX Companies, Inc. (NYSE:TJX) from $77 to $80 and reiterated an Overweight rating. The analyst observed that the operating margins of the “off-price retailers” have gone down to pre-pandemic levels owing to the difficult macroeconomic environment. This has generated a debate over the long-term EBIT outlook for companies. However, Greenberger thinks that The TJX Companies, Inc. (NYSE:TJX) will be able to recapture the EBIT margin in FY23, and the overall growth opportunity is underappreciated by the market. The analyst also increased the company’s EPS forecasts for FY24.

Greenberger also added that recent fieldwork revealed that The TJX Companies, Inc. (NYSE:TJX) has a strong assortment of branded products across all categories that will play positively for the stock in the long run. The TJX Companies, Inc. (NYSE:TJX) offers an annual forward dividend yield of 1.51% as of November 18.

4. Costco Wholesale Corporation (NASDAQ:COST)

Number of Hedge Fund Holders: 69

Costco Wholesale Corporation (NASDAQ:COST) is a Washington-based membership-only big-box retailer. The company leads as the biggest retailer in the world in numerous selected categories.

In a research note issued on October 28, Simeon Gutman at Morgan Stanley stated that 2023 could be a special year for Costco Wholesale Corporation (NASDAQ:COST). The analyst formed this opinion after meeting with CFO Richard Galanti and other members of the executive leadership team. Gutman highlighted that the overhang related to excess inventory is slowly diminishing as Costco Wholesale Corporation (NASDAQ:COST) is working on enhancing unit growth and gaining market share. This is the basis of the growth story for one of the best retail stocks. The analyst has given Costco Wholesale Corporation (NASDAQ:COST) an Overweight rating with a target price of $525.

Cooper Investors shared its outlook on Costco Wholesale Corporation (NASDAQ:COST) in its Q3 2022 investor letter. Here’s what the firm said:

“The US economy continues to run hot – the labour market is extremely tight and a number of executives we spoke to described their challenges in retaining staff and preventing competitors from poaching talent. Industrial companies in particular continue to see record backlogs, with the easing of logistics and supply chain constraints only just starting to have an impact on deliveries and lead times.

In terms of inflationary pressures, the vast majority of our holdings have been able to leverage strong market positions and stakeholder relationships to push pricing through in 2022 such that minimal impact to earnings has occurred. Clearly this is not a lever than can be pulled indefinitely but the more experienced management teams have kept some of their powder dry. Our meeting with management at Costco in Seattle was memorable for several reasons but one was their latent ability to increase member pricing which they have not done in over 5 years (and thus likely to do in 2023)…

…To conclude we’ll return to our meeting with Costco mentioned earlier. The business quality is no secret after decades of incredible execution, but the meeting gave us renewed conviction around Value Latencies in terms of the runway for growth, the focus on enhancing customer value, Costco’s vast buying power (it purchases 30% of the world’s jumbo cashews as one example) and management’s feral focus on the business model and cost discipline.”

Costco Wholesale Corporation (NASDAQ:COST) was held by 69 hedge funds as of Q3 2022.

3. Walmart Inc. (NYSE:WMT)

Number of Hedge Fund Holders: 68

Walmart Inc. (NYSE:WMT) is an Arkansas-based retail giant with 10,500 stores and 210 distribution centers spread across 24 countries. The company employs 2.3 million people globally.

Walmart Inc. (NYSE:WMT) has emerged as one of the best retail stocks based on the Everyday Low Prices (ELDP) philosophy. Experts believe that the market has overreacted to the development of lowering Q4 profit guidance by the company. Meanwhile, the significant reduction in long-term debt during the third quarter is a positive development for Walmart Inc. (NYSE:WMT). The company is expected to attract more mid to high-end consumers looking to save on groceries during economic uncertainty. On October 18, a report issued by Corey Tarlowe at Jefferies reported that consumer discretionary spending is very strong. The analyst increased the target price for Walmart Inc. (NYSE:WMT) from $161 to $165 and maintained a Buy rating.

Here’s what Leaven Partners said about Walmart Inc. (NYSE:WMT) in its Q3 2022 investor letter:

“In our last quarterly letter, I briefly mentioned that the consensus estimates for corporate profits appeared to be a bit too sanguine. I referenced a Reuters article that reported, as of June 17, Wall Street expected S&P 500 earnings to grow by 9.6% in 2022, which was up from 8.8% in April and from 8.4% in January. That tune began to change at the end of July and accelerated in August and September, as major players, such as Walmart (NYSE:WMT), has recently issued profit warnings and/or have withdrawn guidance. In response, Wall Street has altered its outlook: lowering third-quarter profit growth to 4.6%^[2] from 7.2% in early August and slashing full-year profit growth to 4.5%.”

Fisher Asset Management raised its stake in Walmart Inc. (NYSE:WMT) by more than 1500% during Q3 2022.

2. The Home Depot, Inc. (NYSE:HD)

Number of Hedge Fund Holders: 89

The Home Depot, Inc. (NYSE:HD) is an Atlanta, Georgia-based retail giant that sells appliances, construction materials, tools, and services related to home improvement.

In a research note issued on October 31, Steven Zaccone at Citi assigned The Home Depot, Inc. (NYSE:HD) stock a Buy rating with a target price of $340. The analyst thinks that despite the macroeconomic uncertainty, the fundamentals of hardline retail are still positive in the short term. Zaccone believes that retailers like The Home Depot, Inc. (NYSE:HD) have pricing power and operate in the need-based categories. Hence, the company is in control of its margins, given its strong positioning. Experts anticipate The Home Depot, Inc. (NYSE:HD) to grow its market share and enhance sales productivity, making it one of the best retail stocks to buy now.

Diamond Hill Capital shared its bullish stance on The Home Depot, Inc. (NYSE:HD) in its Q2 2022 investor letter. Here’s what the firm said:

“The Home Depot, Inc. (NYSE:HD) is a high-quality operator in the home improvement industry. Macroeconomic concerns, particularly the rise in mortgage rates, caused the share price to pull back and trade at a greater discount to our estimate of intrinsic value. We believe Home Depot is well positioned to continue gaining share due to its premium real estate locations, strong operations and recent investments in its supply chain. We like Home Depot’s exposure to the professional customer and believe in its ability to take market share in this segment as we believe home improvement spending has the potential to remain resilient in upcoming years.”

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Disclose. None. 10 Best Retail Stocks to Buy Now is originally published on Insider Monkey.