The Deutsche Bank report notes that over the past five fourth quarters, the S&P Retail Index has increased an average of 7.7%, outpacing the S&P 500 by 6.9%. With gasoline prices at multiyear lows, better employment and a reasonably healthy U.S. economy, there is every reason to believe this string of outperformance continues.
Deutsche Bank has five top picks in the retail universe and all are rated Buy. We chose the four that appear to have the biggest upside potential: Best Buy Co. Inc. (NYSE: BBY), Dicks Sporting Goods Inc. (NYSE: DKS), Lowe’s Companies Inc. (NYSE: LOW) and Restoration Hardware Holdings Inc. (NYSE: RH).
Best Buy
With everything lining up and new products for the holiday selling season, this top stock makes sense now. Best Buy continues to combat challenging conditions by reducing costs, pricing competitively, optimizing stores and enhancing distribution. The store-within-store partnerships it has with suppliers like Samsung, Apple and Google are continuing to drive more store traffic and product sales. Best Buy’s online channel growth also looks very promising, as it continues to battle Amazon.
The company is expected to grow 2015 earnings by a very solid 27%. One other huge tailwind for the electronics giant is lower gasoline prices are continuing to put more money in consumers’ wallets. That could start to push discretionary buying even higher this year as wage growth also kicks in. A new PC cycle led by Windows 10, and a new iPhone 6s, could also provide a nice lift.
Best Buy investors are paid a solid 2.51% dividend. The Deutsche Bank price target for the stock is $42. The Thomson/First Call price target is $41.45. Shares were trading at $36.53 on Friday’s close.
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Dicks Sporting Goods
This has become the top sporting goods story over the past few years. Dicks Sporting Goods could be looking to make an acquisition to increase market share and store footprint. The company is the largest U.S.-based, full-line omni-channel sporting goods retailer, and it offers an extensive assortment of authentic, high-quality sports equipment, apparel, footwear and accessories. As May 2015, the company operated more than 610 Dick’s Sporting Goods locations. The company also owns and operates Golf Galaxy, Field & Stream and True Runner specialty stores.
Deutsche Bank cites sporting goods stores as a silo of hardline retail that typically survives higher interest rate moves reasonably well. An improving economy should also keep a tailwind behind what many consider to be the premier franchise in the industry.
Shareholders are paid a 1.11% dividend. The $63 Deutsche Bank price target is well above the consensus target of $59.45. Shares closed trading on Friday at $49.20.
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Lowe’s
The Deutsche Bank team feel this company deserves a premium multiple as the higher earnings growth and beat and raise potential are outstanding. Lowe’s is a home improvement company that ranks very high with consumers. It serves approximately 16 million customers a week in the United States, Canada and Mexico through its stores and online. With fiscal year 2014 sales of $56.2 billion, Lowe’s has more than 1,840 home improvement and hardware stores and 265,000 employees.
With new home sales booming, and consumers upgrading existing homes, the company is not only poised for a strong rest of 2015, but 2016 looks outstanding as well.
Lowe’s shareholders are paid a 1.64% dividend. The Deutsche Bank price objective is $80 is in line with the $80.52 consensus target. Shares ended the week at $68.69.
Restoration Hardware
Restoration Hardware has been a momentum trader’s dream since coming back from private equity just over two years ago. It is a high-brow retailer of home furnishings. Its product categories include furniture, lighting, textiles, bathware, outdoor and garden, tableware and children’s furnishings. The analysts see the company expanding product lines, with the kitchen being the big launch this year. It is also expanding the next-generation store galleries in a bigger format.
As of the most recent report, Restoration Hardware operated 70 retail stores consisting of 62 Galleries, five full line Design Galleries and three Baby & Child Galleries, as well as 17 outlet stores in the United States and Canada. The company leads many of their hardline retail peers with a stunning 50% of total sales via the e-commerce channel.
The Deutsche Bank price target is $105, and the consensus target is $111. Shares closed Friday at $97.07.
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It is not hard to believe that the retail stocks are the fourth-quarter champs, and with this year looking to be no exception, investors with growth objectives should look to add some to a well-rounded portfolio.
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