Retail Stocks: Will Brick-And-Mortar Stores Disappear?

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Includes: GPS, WMT
by: George Putnam

Summary

Many retail stocks have fallen nearly 50% from recent highs.

Despite strong online retail results, brick & mortar will survive--and thrive.

These value stock picks offer strong balance sheets and decent dividends.

Will Brick-and-Mortar stores disappear? Our answer is "No, at least not for many decades"--but to look at the stock performance of most traditional retailers over the past year, it appears that many investors disagree. When some retailers posted disappointing results last autumn, many retail stocks dropped 40-50% from highs set only a few months earlier.

To be sure, online shopping is going to continue to grow; but we believe that the best of the traditional retailers will not only survive but will thrive as they leverage their strong brands to put together an appealing combination of online and brick-and-mortar shopping experiences. These stronger players will gain market share as some of their weaker rivals are not able to adapt to the evolving retail environment. The companies discussed here have good brands and relatively strong balance sheets, pay a decent dividend and have stocks trading well below their 12-month highs. Access the full distressed investing article for three additional value stock picks from the retail sector.

The Gap (NYSE: GPS) owns some of the more resilient brands in retailing, including Gap, Old Navy and Banana Republic. Athleta, the company's newer active-wear label, has the potential to become a strong fourth brand. In addition to temporary headwinds from a stronger dollar, port closures and an unusually warm winter, management has recognized that it needs to re-establish the style/quality/value paradigm for which the company has been known. Strong financials should support the decent dividend and a $1 billion stock buyback program.

Wal-Mart (NYSE: WMT) is being challenged on many fronts, from smaller, low-cost competitors to large, bulk-product providers. Management has responded by closing some locations, including all its Wal-Mart Express facilities, while rolling out a fresh new layout in its flagship stores. It is also spending heavily to boost online sales. Wal-Mart remains the 800-pound gorilla of retailing. A very strong balance sheet, good dividend and substantial stock buyback program make Wal-Mart a good choice for conservative investors looking to benefit from a rebound in retail.

Retailers: Not Dead Yet

Company

Symbol

Recent Price

1-Year Range

Market Cap $Bil.

Forward P/E

Dividend Yield %

The Gap

GPS

29.03

43.90-21.57

11.5

12.1

3.20

Wal-Mart

WMT

68.12

83.04-56.30

218.1

15.6

2.94

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.