Retail Industry in 2022: The Complete Investors Guide Retail stocks had an outstanding year in 2021 due to the stimulus payments and pandemic improvement. Find out what's in store for the sector in 2022 and why you should...

Retail stocks had an outstanding year in 2021 due to the stimulus payments and pandemic improvement. Find out what's in store for the sector in 2022 and why you should consider high-quality stocks like Macy's (M), Walmart (WMT), Target (TGT), Costco (COST), and CVS Health (CVS).

2021 was a spectacular year for the retail industry, as it benefitted from stimulus payments and pent-up demand from consumers to go shopping in brick-and-mortar stores. The SPDR S&P Retail ETF (XRT) rose 42% in 2021, outperforming the S&P 500's 27% gain.

It's unusual to see such a quick and sharp rebound following a recession. For instance, following the Great Recession in 2008, it took 2 years until retail sales returned to pre-recession levels. However, retail sales were 18% higher in December 2021, compared to December 2019.

Following this outperformance in 2021, there are some emerging headwinds in 2022 that investors should be aware of. One is that last year's inventory shortages could turn into surpluses, which could force retailers to discount out-of-season items. Another concern is that consumer spending could slow due to the expiration of stimulus payments and higher food and energy costs.

In addition, over a longer time frame, retailers continue to face some secular challenges as well, such as the rising share of e-commerce spending, decreasing foot traffic to physical stores, and the changing shopping habits of Millennials and Generation Z. These issues led to underperformance for many retailers during the previous decade in addition to several, high-profile bankruptcies.

Though the post-pandemic period has seen some reversal in these trends, it could also prove to be temporary. This report will look at the retail industry's prospects in a post-pandemic world that no longer has generous fiscal policy which created a rising tide for the sector.

What is the Retail Industry?

The retail industry is composed of companies that sell final products to end-user consumers. The industry is part of both the consumer staples and consumer discretionary sectors and includes everything from clothing and department stores to home improvement and auto parts stores. On the consumer staples side, retail companies include discount stores such as Dollar General (DG), grocery stores like Albertsons (ACI), and wholesale clubs like Costco (COST). The cyclical sector includes stores that sell apparel, luxury goods, and specialty products such as electronics and home furnishings.

A Changing Industry

The retail industry has seen its share of changes over the past few decades. Sixty years ago, there were many mom-and-pop stores and just a few department stores in major cities. Then came big box stores, such as Walmart (WMT), that made it harder for small stores to compete. We also saw large specialty chains such as Home Depot (HD) and Lowes (LOW) that put small specialty stores out of business.

Many department stores, that were successful for decades, were located in malls, which were very popular in the 80s and 90s, but foot traffic and visits to malls have spiraled lower. Many of these stores, like Sears and JC Penney, failed to keep up with changing trends and filed for bankruptcy.

Traditionally, if you wanted to purchase a product, you would go to the store, pick it up and pay for it. But now, online shopping has changed retail. All you need to do is select a product on a store's website, pay for it, and it's shipped to your home. You never have to leave your house.

Not only is the ease of e-commerce beneficial for the consumers but the retailers benefit as well. Stores don't need to pay the overhead costs of maintaining as many, or any, physical stores. It can lead to higher margins and higher rates of repeat buying.

Retail Stocks to Buy

2020 and 2021 were very unusual years for the economy and retail industry. 2022 should bring us closer to a "normal" post-pandemic economy with less stimulus but also relief from supply chain issues and transportation bottlenecks negatively affecting inventories. We will also find out how much of the rebound in foot traffic to physical stores is a new trend or just a temporary fad.

Below, I'll highlight 5 retailers that are positioned to thrive in the post-pandemic economy.

Target Corporation (TGT)

TGT is one of the largest retailers in the country, with about 1,900 stores in the U.S. It's also the 3rd largest e-commerce retailer as well.

TGT was one of the big winners during the pandemic as its e-commerce operations and designation as "essential" resulted in a big surge in sales which was also abetted by the stimulus payments.

In 2021, TGT had $9.35 in EPS and $93.6 billion in revenue. In 2022, this is forecast to increase to $13.25 in EPS and $106.5 billion in revenue. TGT also has growth across all major segments with 9.7% same-store sales growth and a 29% increase in online sales.

Despite this above-average growth, TGT remains reasonably valued with a forward P/E of 15 which is below the market average of 19.5. TGT also pays a 1.76% dividend yield which is above the market average. TGT has also seen an increase in sales as customers seek out "value" due to inflation. It's also likely to benefit from a resumption of growth in online sales or if foot traffic to stores remains ascending due to its diversified operations.

TGT has a B rating in the POWR Ratings system which translates to a Buy. B-rated stocks have posted an average annual performance of 21.0% which compares favorably to the S&P 500's average annual 8% performance.

The company has a Quality Grade and Value Grade of B, indicating its management team's long-term track record of growth and execution along with its attractive valuation. Click here to see more of TGT's POWR Ratings.

Walmart Inc. (WMT)

WMT is the world's largest retailer. It operates Walmart Stores, Supercenters, and Sam's Club locations in the United States. It also has a fast-growing e-commerce business, which includes Walmart.com and Jet.com. In fact, WMT is even shrinking the gap between it and AMZN in the e-commerce space.

Like TGT, WMT's omni channel platform will keep bringing in customers. The company launched its Walmart+ subscription delivery service which is priced at $98/year. While you don't need the membership to get free two-day shipping, the membership provides free next-day and two-day shipping with no order minimum. It also offers free delivery from your store. Plus, WMT now also provides healthcare & financial services, including insurance.

In 2021, Walmart had revenue of $573 million and $6.75 in EPS. Next year, analysts are forecasting $606 billion in revenue and $7.17 in EPS. The company also has a forward P/E of 20.7 which is only slightly higher than the S&P 500's forward P/E of 19.5. WMT also tends to do well in inflationary environments as consumers prioritize value and buying in bulk. WMT's strategy has been to keep prices low, and it's been less affected than its peers by the supply chain issues and transportation bottlenecks as it owns its own ships and trucks.

WMT has an overall grade of B, which translates into a Buy in our POWR Ratings system. It also has a Value Grade of B, which is not surprising given its attractive valuation.

The company has a Quality Grade of B, meaning it has a healthy balance sheet and a capable management team. As of its most recent quarterly report, the company had $16 billion in cash, compared to $4.8 billion in short-term obligations. We also provide Growth, Momentum, Stability, and Sentiment grades for WMT, which you can find here.

Costco Wholesale Corporation (COST)

While TGT and WMT are two of the largest and most well-known discount stores, COST is one of the most-well known warehouse clubs. A warehouse club is a membership-based store where customers can purchase bulk items, which provides substantial savings. Customers can also access COST's selection of branded and private label products in an assortment of categories.

The company and its stock fared quite well over the past year with a 45% gain. The company continues to add new stores and has a very loyal customer base (90% membership renewal rate). Like WMT, COST tends to do better in inflationary environments as people are more likely to prioritize value and savings.

Last year, COST reported $11.09 in EPS and $195.9 billion in revenue. This year, it's forecast to earn $12.89 per share and generate $218.7 billion in revenue which equates to 16% earnings growth and 12% revenue growth.

With this type of growth, it's not surprising that COST has an overall grade of B or a Buy Rating in our POWR Ratings system. It also has a Sentiment Grade of B, indicating that it is well-liked by Wall Street Analysts. According to the StockNews Price Target feature, 14 out of 18 analysts rate it a Buy or Strong Buy. If you would like to know how COST fares in its Value, Growth, Momentum, Stability, and Quality Grades, click here.

Macy's (M)

M is an omnichannel retail company that operates its stores, websites, and mobile applications under three brands: Macy's, Bloomingdale's, and Bluemercury. It sells a range of merchandise for men, women, and kids, including apparel and accessories, cosmetics, home furnishings, and other consumer goods.

M is in the midst of an impressive turnaround as it was able to figure out a successful digital strategy during the pandemic, using its stores as fulfillment centers. At the same time, it got a boost from pent-up demand to shop in physical stores which led to a massive increase in terms of same-store sales. This boost should persist for multiple quarters, especially in categories like jewelry, luggage, and formalwear.

In 2021, Macy's EPS came in at $4.88 per share vs a loss of $2.21 per share the previous year. Next year, analysts expect EPS to decline to $4.08 per share. Similarly, analysts expect revenue to decline by 0.2% in 2022 from $24.2 billion in 2021 which was a 40% improvement from 2020.

M's strong fundamentals are reflected in its POWR Ratings. It has an overall B rating, which equates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

M has an A grade for Growth and Value. Even though Macy's growth may slow in 2022, its growth outlook looks positive for the future with its growing e-commerce segment. Further, the stock is quite cheap with a P/E of 9.3. In the A-rated Fashion & Luxury industry, it is ranked #22 of 65 stocks. Click here to see the complete ratings for M.

CVS Health Corporation (CVS)

CVS is one of the largest healthcare companies in the U.S. and one of the most popular drugstores. It's been a beneficiary of the vaccine rollouts and sales of testing kits.

Thus, 2021 was an outstanding year for CVS. The company had 9% revenue growth and 11% earnings growth. In 2022, analysts are expecting a flat year with some slowing in retail sales offset by higher revenue from its health insurance segment.

Entering 2021, there was skepticism about the retail pharmacy business given new entrants in the space like Walmart (WMT) and Costco (COST), while many believe Amazon (AMZN) is also planning to launch its own pharmacy. However, CVS defied the skeptics in 2021. The company has also become bigger than just a pharmacy with its merger with Aetna and offering of health services at its retail locations.

CVS is rated a Strong Buy in our POWR Ratings system. A-rated stocks have posted an average annual performance of 31.1% which compares favorably to the S&P 500's average annual performance of 8%.

The stock also has a forward P/E of 11.4 which is cheaper than the S&P 500. It also pays a healthy 2.2% dividend yield. The stock has long-term growth potential given its health insurance exposure and offering of various health care services. If you're interested in seeing CVS's complete POWR Ratings including Growth, Stability, Momentum, Sentiment, and Quality Grades click here.

WMT shares were trading at $136.69 per share on Tuesday afternoon, down $1.30 (-0.94%). Year-to-date, WMT has declined -5.53%, versus a -9.14% rise in the benchmark S&P 500 index during the same period.

Walmart (WMT) and Costco (COST) are part of the Entrepreneur Index, which tracks some of the largest publicly traded companies founded and run by entrepreneurs.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini's background, along with links to his most recent articles.

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