5 Retail Stocks To Ride Out The Brick-and-Mortar Debacle

A bleak year seems to be unfolding for brick-and-mortar, with major chains losing sales and customers switching to online alternatives. Traditional retailers have apparently failed to transform fast enough to cater to changing consumer tastes. Evidence of this fact is the number of stores major chains are shuttering.

But the outlook isn’t as dismal as it seems at first. A proposed border-adjustment tax, which could hurt the sector badly, looks increasingly unlikely. Major industry players have stepped up lobbying to avert the imposition of such a levy.

Also, several retailers have managed to avoid being swept away by recent changes even as others have adapted better to the new environment. Select brick-and-mortar stocks still offer the promise of strong profits and you wouldn’t put a foot wrong if you added them to your portfolio.

Border Adjusted Tax Unlikely

During the first quarter of this year, three retail majors increased their lobbying expenditure nearly fourfold. This was an attempt to stave off a tax proposal which could potentially threaten the very existence of the entire industry. At $3.2 million, the total amount spent by Best Buy Co., Inc. (NYSE:BBY) , Target Corp. (NYSE:TGT) and The Gap, Inc.’s (NYSE:GPS) on lobbying was a substantial increase over last year.

For an industry heavily reliant on imports, such a level of urgency was only natural. Industry body National Retail Federation has also put its weight behind such efforts, spending around $2.3 million on lobbying during the quarter. Now signs are emerging that President Trump’s tax plan, scheduled to be unveiled on Wednesday, will not include a border adjusted tax.

Last week, White House Budget Director Mick Mulvaney said the proposal was still being discussed, because though it would raise significant revenues, achieving revenue neutrality would be extremely difficult in this situation. This could result in another standoff in the Senate, one which the current administration is eager to evade at the moment.

Transformation, Nimbleness Key to Success

If indeed the industry escapes the imposition of a border adjustment tax, it would come as welcome relief to its beleaguered members. According to Credit Suisse (SIX:CSGN) Group AG (TO:CS) , nearly 2,880 stores have been shuttered up to April 6 this year. This is symptomatic of a raft of changes sweeping through the industry, which includes a switch to online retailers, changing shopping habits and a fall in store productivity.

Several of these closures have been preemptive in nature, as retailers try to stay ahead of the curve by shuttering stores which are currently profitable. Prominent among such operators are Sears Holdings Corp. (NASDAQ:SHLD) , Macy's, Inc. (NYSE:M) and J. C. Penney Company, Inc. (NYSE:JCP) .

But even among this doom and gloom, opportunities have opened up for several operators. For instance, Best Buy stands to benefit from the vacuum created by the bankruptcy of other electronics retailers such as hhgregg and RadioShack. Wal-Mart Stores, Inc. (NYSE:WMT) is adapting to the situation differently, as borne out by its decision to buy clothing retailer Bonobos.

An online and brick-and-mortar hybrid is in development and even Amazon.com, Inc. (NASDAQ:AMZN) is not immune from these changes. Its decision to open up grocery and book stores is a sign that it has much to learn from brick-and-mortar after all.

Our Choices

Though recent changes have been industry wide, with no company being spared the resultant outcomes, there could be better days ahead for retail after all. Brick-and-mortar will continue to play a crucial role even as key players adapt to changing circumstances.

Picking select stocks still standing firm in such a scenario continues to make for a smart choice. However, picking winning stocks may be difficult.

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM score.

Performance of Stock Picks vs. Retail-Wholesale Sector (1 Year)

Best Buy is a multinational specialty retailer of consumer electronics, home office products, entertainment software, appliances and related services.

Best Buy has a Zacks Rank #1 (Strong Buy) and a VGM Score of A. The company has expected earnings growth of 3.5% for the current year. The stock has returned 54.3% over the last one year, easily outperforming the Zacks Retail And Wholesale sector, which has gained 10.6% over the same period

Big 5 Sporting Goods Corporation (NASDAQ:BGFV) is a leading sporting goods retailer in the Western U.S.

Big 5 Sporting Goods has a Zacks Rank #1 and a VGM Score of A. The company has expected earnings growth of 35.1% for the current year. Its earnings estimate for the current year has improved by 20.6% over the last 60 days. The stock has returned 34.2% over the last one year, easily outperforming the Zacks Retail And Wholesale sector, which has gained 10.6% over the same period

The Children's Place, Inc. (NASDAQ:PLCE) is a growing specialty retailer of apparel and accessories for children from newborn to twelve years of age.

The Children's Place has a VGM Score of A. The company has expected earnings growth of 22.1% for the current year. The stock has returned 42.1% over the last one year, easily outperforming the Zacks Retail And Wholesale sector, which has gained 10.6% over the same period. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Burlington Stores Inc. (NYSE:BURL) operates as an off-price apparel and home product retailer.

Burlington Stores has a Zacks Rank #2 (Buy) and a VGM Score of A. The company has expected earnings growth of 20.6% for the current year. Its earnings estimate for the current year has improved by 0.3% over the last 30 days. The stock has returned 71.6% over the last one year, easily outperforming the Zacks Retail And Wholesale sector, which has gained 10.6% over the same period.

The TJX Companies, Inc. (NYSE:TJX) is a leading off-price retailer of apparel and home fashions in the U.S. and worldwide.

TJX Companies has a Zacks Rank #2 and a VGM Score of A. The company has expected earnings growth of 10.7% for the current year. The stock has returned 1.9% over the last one year, underperforming the Zacks Retail And Wholesale sector, which has gained 10.6% over the same period. This provides a good opportunity to buy the stock given that there is significant upside potential.

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