It’s almost here, the best time of the year, especially if you live in any of the northern latitudes of the United States. Once again, Americans are planning to do what they always do: vacation and go all-in for summertime fun. As has been the case over the past few years, it is looking like most Americans are planning to spend a fair amount of their hard-earned dollars, and with good reason. The economy is better, wages are growing and, despite somewhat higher prices at the gasoline pump, things are looking good.
The question for investors is where that money will be spent. As is usually the case, the bigger retail players look to have better odds for a large share of the consumer dollars. Plus, as an extra bonus this year, retail stocks are offering solid entry points, in addition to dependable dividends.
We screened the Merrill Lynch retail universe and found five of the best U.S. retailers with stocks rated Buy. All look to be solid choices for growth investors this summer.
Costco Wholesale
This has become the ultimate destination for the American consumer regardless of the economy. Costco Wholesale Corp. (NASDAQ: COST | COST Price Prediction) has a unique business model. It operates membership warehouses and the company buys the majority of its merchandise directly from manufacturers, essentially cutting out the middleman. Costco sells in bulk but also at a lower price, thus fueling its rapid growth. With consumers having more free cash to spend with gasoline prices still low, this major retailer may continue to see large revenue gains.
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Costco remains one of the few conventional retailers where metrics like store traffic, market share gains and a validated model could bode well for international growth and expansion. The company is largely unharmed by e-commerce, and it continues to add stores in strategically mapped out locations.
Wall Street loves the company’s pricing authority on key items and the leading merchandising offerings, and the company’s relatively new Costco co-branded card with Visa is a real positive. Add in the company’s growing online presence, and the future looks bright.
Costco shareholders receive a 1.08% dividend. The Merrill price target for the shares is $255, and the Wall Street consensus target is $248.50. Shares closed trading Wednesday at $241.34.
Kohl’s
Shares of this top retailer got hit recently and are offering an excellent entry point now. Kohl’s Corp. (NYSE: KSS) operates department stores in the United States that offer private label, exclusive and national brand apparel, footwear, accessories, beauty and home products to children, men and women customers. The company also sells its products online at Kohls.com and through mobile devices.
While retail chains have suffered from internet pressure, Kohl’s has held its own as consumers see the company as a solid discount retailer. In addition, Amazon is growing its partnership with the department store chain. Last summer, the two companies announced that Kohl’s would begin selling Amazon devices, such as the Echo and Fire tablets, at selected stores.
In addition, Kohl’s and Amazon also announced last month that all Kohl’s stores will be accepting free, convenient returns for Amazon customers starting in July. Kohl’s and Amazon first worked together in 2017 to pilot the returns program, which is currently operating in 100 stores in the Los Angeles, Chicago and Milwaukee markets.
Kohl’s and Amazon will roll out the program to all of Kohl’s more than 1,150 locations across 48 states. Kohl’s will accept eligible Amazon items, without a box or label, and return them for customers for free, providing additional service and convenience to Amazon customers.
Investors receive a 3.91% dividend. Merrill has an $80 price target, and the consensus target is $76.31. Shares closed at $68.54 on Wednesday.
McDonald’s
The fast-food giant remains a solid pick for investors seeking dividends and a degree of safety. McDonald’s Corp. (NYSE: MCD) is the world’s leading global food-service retailer with over 36,000 locations serving approximately 69 million customers in over 100 countries each day. More than 80% of McDonald’s restaurants worldwide are owned and operated by independent local businesspersons.
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McDonald’s earnings were a touch light this quarter, and the Merrill analysts noted this:
McDonald’s reported first quarter 2019 EPS of $1.72, modestly light of $1.75 consensus (all due to the sell-side not reflecting tax guidance). We lower our 2019 EPS by $0.05 on higher G&A and interest expense guidance partially offset by higher comp expectations. We think strong top-line trends should drive an expanding McMultiple despite limited positive near-term earnings revisions.
Where better for busy American families on vacation this summer to stop and get a meal than the golden arches, whose years of familiarity and thousands of locations make it a reasonable and good fast-food experience.
Shareholders receive a 2.35% dividend. The $215 Merrill price target compares with a $214.25 consensus target. The shares were last seen at $198.03.
Target
This is another solid and safe retail total return play, and it also resides on the Merrill Lynch US 1 list of top stock picks. Target Corp. (NYSE: TGT) is one of the largest discount retailers in the United States, operating roughly 1,800 Target stores across the country. The company sells merchandise in its Signature Categories Style, Baby, Kids and Wellness, as well as other products in both physical Target stores and online at Target.com.
Since 2017, Target has poured tons of money into its e-commerce offerings, overhauling its stores and refreshing its inventory to better compete against Amazon. Target has even embraced the same-day delivery concept and is expanding retail floor space for toys as it looks to scoop market share after the closing of Toys “R” Us.
Solid numbers and a very positive analysts day had the Merrill analysts noting that they believe the company’s ability to moderate fulfillment costs through its “stores as hubs” model should drive margin improvement in fiscal 2020. They also feel the valuation is compelling at current levels.
Shareholders receive a 3.39% dividend. Merrill has set its price objective at $100. The consensus target price is just $86.65, and shares closed most recently at $75.41.
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Walmart
The giant retailer’s shares have rallied nicely off last December’s lows, but they still have upside. Walmart Inc. (NYSE: WMT) is the world’s largest retailer, operating retail stores under the formats of Walmart Stores, Supercenters, Neighborhood Markets, as well as Sam’s Club locations, in the United States, and it has a growing e-commerce business (including Jet.com). Internationally, Walmart also operates locations in several countries, including Argentina, Brazil, Canada, China, Japan, Mexico and the United Kingdom.
Each week, nearly 260 million customers and members visit the company’s 11,535 stores under 72 banners in 28 countries and e-commerce sites in 11 countries. In addition, the company announced in the summer plans to acquire a 77% stake in India e-commerce retailer Flipkart in a $16 billion debt and cash transaction. The deal dramatically expands Walmart’s presence in India, where online retail is growing quickly and Flipkart is a leader.
Shareholders receive a 2.11% dividend. The Merrill Lynch price target is $120. The consensus target is $108.97, and shares closed at $100.30.
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These are five of the biggest retailers continuing to fight the huge online presence of Amazon. Consumers continue to show loyalty to all five, and they may be poised to have a big summer selling season, with consumer confidence continuing to be very solid and earnings looking decent as well.
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