The retail sector has had a brutal year. Not only have retailers struggled with unfavorable weather and the strong U.S. dollar, but they also have had to contend with Internet retail giant Amazon.com (NASDAQ: AMZN).
Amazon is becoming a force to be reckoned with. Its ability to offer fast shipping, the convenience of at-home shopping, and lower prices than brick-and-mortar retailers could one day render many physical retailers obsolete.
But not all retailers are falling prey to Amazon.
Home Improvement Is Thriving
Home Depot (NYSE: HD) is the world’s largest home improvement retailer and has a very strong brand. In addition, the company is benefiting from some key fundamental tailwinds.
While U.S. consumers have curtailed spending on apparel, they are still very willing to spend on their homes. This is a key difference that insulates Home Depot from Internet retail competition.
Last year, Home Depot’s sales grew 6% to $88.5 billion. Comparable-store sales, a key metric for retailers that analyzes performance at stores open at least one year, increased 5% in 2015.
Overall, earnings per diluted share in fiscal 2015 grew 15% to $5.46, compared to $4.71 per diluted share in the previous year.
The company followed up with strong performance to start 2016. Home Depot’s comparable sales grew 6% and earnings per share rose 19%. In addition, Home Depot raised its full-year guidance, and now expects 6% sales growth along with 14% earnings growth.
The reason why Home Depot is becoming Amazon-proof is because if consumers expect home improvements will increase the value of their homes, they are very likely to spend more at home improvement retailers.
Like Home Depot, close competitor Lowe’s Cos. (NYSE: LOW) is a home improvement retailer that is benefiting from the same consumer trends. Comparable sales jumped 7% in the first quarter, leading to 40% year-over-year earnings growth. It expects to increase total sales by 6% this year, and comparable sales by 4%. This performance came after a very successful 2015, in which Lowe’s increased EPS by 21% from the previous year.
Going forward, future growth could come in the international markets. In February, Lowe’s launched a $2.3 billion takeover attempt of Canadian home retail giant Rona. Lowe’s expects the deal to close in May.
Discount Brands Can Still Succeed
TJX Cos. (NYSE: TJX) gets a nod here because it has beaten back Amazon in two key ways.
First, TJX has mastered the off-price concept. In an uncertain economic climate, consumers are demanding low prices, and the T.J. Maxx and Marshall’s brands provide excellent value.
Second, there is TJX’s Home Goods banner, which is proving to be its hidden gem. Like Home Depot and Lowe’s, Home Goods is a play on home furnishings.
Last year, TJX grew total sales by 6% to $30.9 billion, and comparable sales by 5%. Earnings per share jumped 5% for 2015, to $3.33 per share. The company has enjoyed a prolonged period of success, thanks to its brand strength. In fact, last year marked 20 years in a row of increases in both comparable sales and earnings per share.
This year should make it 21 in a row. Last quarter, TJX grew comparable sales and EPS by 7% and 10%, respectively, and it also raised its full-year outlook. The company now expects 2%-3% growth in comparable sales this year.
Braving the Amazon
The retail business is changing. Amazon is a major disruptor, and the industry needs to adapt. Over the long term, it’s not inconceivable to think many retailers won’t be around – due entirely to Amazon.
But home-improvement and home-goods retailers can still succeed. That’s what Home Depot, Lowe’s – and to a lesser extent, TJX – have in common.
Consumers love shopping from home, but when it comes to purchasing items for the home, many consumers need to ask questions or see things in person. These are the key factors helping these three retailers thrive while Amazon seemingly takes over the retail industry.
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