With a Couple of Exceptions, It's Best To Stay Clear of Bricks-and-Mortar Retail

Traditional retailers are struggling to keep pace with Amazon and other e-commerce sites.
By Chiradeep BasuMallick ,

"Weak," "shaky," "unreliable": Analysts are skimming through their thesauruses to find words to describe same-store sales in retail. Even Costco Wholesale, usually dependable, said that its June same-store sales in the U.S. were flat.

It's best to avoid bricks-and-mortar retail. 

Most of these companies have been unable to keep pace with Amazon, which has become the dominant force in retail and other e-commerce-based competitors. They have also suffered from the changes among fashion brands that can market their products directly to consumers rather than work through traditional retail channels. 

To be sure, there are a few niche alternatives that could make you money, including Ross Stores and Burlington Stores. They may seem expensive, but the companies are in better shape than other chains.

That is largely because discounters attract different shoppers than many other types of retailers. Some of these shoppers may not have a computer or smart phone. Ross Stores (ROST) - Get Report and Burlington Stores (BURL) - Get Report can provide investors with some continuing profits.

Still, they are exceptions. Below are three major reasons to invest in other industries.

E-commerce Has Won the Market

E-commerce is taking over retail, even influencing individual events. 

Ahead of its second Prime Day, in which the company offers deep discounts on merchandise, E-commerce giant AmazonovertookBerkshireHathaway to become the fifth largest U.S. company. The first Prime Day, which occurred last fall, was a major hit.

Bricks-and-mortar companies that have been struggling to keep pace with Amazon responded to the latest Prime Day with their own special events. Target, Sears, Express, and Gap are offering customer-friendly deals. Retail dinosaur Wal-Martdropped the $50 minimum spending requirement for shoppers to receive free shipping on online orders.

The Signs Are in the Wrong Direction

L Brands benefited by selling lingerie at cheap rates, but it's already warned that same-store sales could be flat to down by low single digits for July. And it's not alone in this trend.

Sales at Gap's flagship brand slipped 1%, and even Banana Republic fell 4% in June. For years, the company has been struggling with issues related to quality and retaining customers. 

Costco's sales hardly moved, pointing to growth issues if this trend holds for a couple more months.

There Are Only a Few Silver Linings in This Cloud

The valuations for retail stocks are not cheap if you adjust them for expected earnings growth. For instance, Gap trades at 11.2 times forward price/earnings, but when adjusted for growth, its price/earnings growth (PEG) ratio stands at 1.54.

Off-price retailer Burlington Stores trades at forward P/E of 20.68 times but thanks to its earnings growth prospects, its PEG ratio is at a cheap 1.40.

L Brands has a pricier PEG ratio of 1.68 akin to American Eagle Outfitters, with a PEG ratio of 2.62 despite its forward P/E at 12.3 times. 

---

As you can see, the profits to be made from brick-and-mortar retail will come from discounters. But what if I told you about a way to make a steady income this year... guaranteed? A trader I know turned $50,000 into $5 million trading this way and for a limited time, he's guaranteeing you at least $67,548 per year in profitable trades if you follow this simple step-by-step process.Click here to see how easy it is to collect thousands of dollars in "Free Money" every month.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

Loading ...