On January 23rd we prepared the article below that discussed the 12 most undervalued retail stocks to buy according to hedge funds. We didn't publish this article but decided to follow the performance of these stocks. Our research and experience indicate that hedge funds' top stock picks generate a significant amount of alpha. This article is another example of this finding. The SPDR S&P Retail ETF (XRT) lost 4.3% since January 20th, however the five most undervalued retail stocks to buy according to hedge funds gained 6.5% during the same period. You can skip our discussion and see hedge funds' top 5 undervalued retail stock picks here.
While no industry is immune to recession, certain industries such as consumer and retail, post sound performance even in tough economic conditions. However, certain trends like economic volatility, inflation, and change in consumer habits are here to stay in 2023 which might limit the growth prospects of consumer and retail industry. On top of it, US retail sales saw a decline in December 2022, falling by 1.1% as a result of high inflation. The soft month during December has increased worries as investors fear that 2023 might bring a downturn in consumer spending. Experts were predicting a decline of just 0.8% for the month.
According to National Retail Federation, during the November and December holiday season, retail sales saw 5.3% growth over 2021 to $936.3 billion. In 2023, retailers are required to focus on optimizing their operations to become immune to the challenging economic environment. Retailers plan to use technology and solutions so that their businesses stay competitive in changing economic environment. An omnichannel marketing strategy is expected to support retailers in terms of reach.
National Retail Federation’s Chief Economist views that companies should manage inventories more tightly in 2023. This comes after they were forced to heavily discount goods last year as a result of huge unsold merchandise. Positives in the form of favorable demographics, and low penetration of organised retail are expected to help the retail industry over the medium term.
Dollar Tree, Inc. (NASDAQ:DLTR) reported financial results for the third quarter of fiscal 2022. Its consolidated net sales saw 8.1% growth to $6.94 billion, while operating income grew 22.8% to $381.3 million. The company’s gross profit grew 17.5% to $2.07 billion, while gross margin improved 240 bps to 29.9%. Growth was led by improved initial mark-on and leverage on occupancy and distribution costs. The company’s Q3 2022 sales performance exhibits timely execution of merchandising initiatives to support consumables business.
Wayfair Inc. (NYSE:W) has announced financial results for Q3 2022. The company’s total net revenue came in at $2.8 billion, exhibiting $281 million or 9.0% decline year-over-year. Its gross profit was $824 million or 29.0% of the total net revenue. The company announced additional details about right-sizing its cost structure and continued strong business performance since the Cyber Five period. Totaling over $1.4 billion in annualized cost actions, the plan is well underway and should accelerate its timeline for adjusted EBITDA breakeven to earlier in 2023 as the first step to positive FCF.
12 Most Undervalued Retail Stocks to Buy According to Hedge Funds
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Our Methodology
We used the latest holdings of SPDR S&P Retail ETF (XRT) to identify retail companies but we excluded automotive retailers and dealerships from this list. Then we used Insider Monkey's hedge fund sentiment data to rank these stocks. Basically, our list represents the most undervalued retail stocks according to hedge funds.
12 Most Undervalued Retail Stocks to Buy According to Hedge Funds
eBay Inc. (NASDAQ:EBAY) is a global commerce leader connecting millions of buyers and sellers in over 190 markets around the world. The company enables economic opportunity for individuals, entrepreneurs, businesses, and organizations of all sizes.
eBay Inc. (NASDAQ:EBAY) has released its financial results for Q3 2022, with revenues coming at $2.4 billion and Gross Merchandise Volume (GMV) at $17.7 billion. The company generated $735 million of operating cash flow and $633 million of FCF from continuing operations. Its third quarter results exhibit progress against its long-term objectives and surpassed all expectations for critical business metrics.
eBay Inc. (NASDAQ:EBAY) anticipates revenue in the range of $2.42 billion - $2.50 billion in Q4 2022 and $9.71 billion - $9.79 billion for the full year.
Its CAO Brian J. Doerger sold 9,542 shares of the company’s stock in a transaction on November 10 at an average price of $44.12 for a total transaction of $420,993.04.
According to Insider Monkey’s data, 42 hedge funds were bullish on eBay Inc. (NASDAQ:EBAY) at the end of September 2022, compared to 43 funds in the prior quarter.
Analysts at Barclays initiated coverage on the shares of eBay Inc. (NASDAQ:EBAY). They reduced their price objective on the company’s stock from $59.00 to $56.00 and gave an “Overweight” rating on November 3.
Smead Capital Management, an investment management company, released its third quarter 2022 investor letter and mentioned eBay Inc. (NASDAQ:EBAY). Here is what the fund said:
“Two things are very noticeable right off the top. First, sometimes you have to be happy losing less in a bear market environment so that you have more of your capital to grow in the next bull market. We are never really happy losing money. Second, 2022 is likely to be our third year of existence as a fund to lose money for the year. This year would join 2008 and 2018 in this undistinguished category. Our biggest detractors was dominated by eBay (NASDAQ:EBAY). Consumer/investor fears about media and e-commerce hit WBD and EBAY and profit taking in Amgen came from early 2022 strength.”
Ross Stores, Inc. (NASDAQ:ROST) operates 2 brands of off-price retail apparel and home fashion stores—Ross Dress for Less and dd’s DISCOUNTS®.
The company ranks 11 on our list of 12 most undervalued retail stocks to buy according to hedge funds.
Ross Stores, Inc. (NASDAQ:ROST) has released its results for the third quarter of 2022. Its sales for Q3 2022 came in at $4.6 billion, in line with the previous year. The company’s Q3 2022 results were above its expectations as the company delivered stronger values throughout its stores. Operating margin for the period came at 9.8% against 11.4% last year. This exhibits the deleveraging effect from the comparable sales decline and higher markdowns pressure and unfavorable timing of packaway-related costs. Given the headwinds it had to face during Q3 2022, these results were healthy.
Ross Stores, Inc. (NASDAQ:ROST) expects Q4 2022 same store sales to be flat to down 2% against 9% gain in the prior year, while EPS is forecasted to be between $1.13 to $1.26. Its EPS for the full year is projected to be between $4.21 to $4.34 against $4.87 last year.
Barclays covered the shares of Ross Stores, Inc. (NASDAQ:ROST) on January 13 and upped their price target on shares of the company from $127.00 to $139.00, giving an “Overweight” rating.
According to Insider Monkey’s Q3 data, 43 hedge funds were long Ross Stores, Inc. (NASDAQ:ROST) compared to 46 funds in the previous quarter.
Madison Funds, which is being managed by Madison Investment Management, released its fourth-quarter 2022 investor letter and mentioned Ross Stores, Inc. (NASDAQ:ROST). Here is what the fund said:
“The top five contributors for the quarter were Arch Capital Group, Ross Stores, Inc. (NASDAQ:ROST), Gartner, Markel, and PACCAR. Ross Stores is experiencing a difficult retail environment for the low-end consumer. However, results held up better than expected and the outlook appears to be improving.”
Etsy, Inc. (NASDAQ:ETSY) operates two-sided online marketplaces connecting millions of buyers and sellers around the world. The company, which has a market cap of approximately $16.5 billion, ranks 10 on our list of 12 most undervalued retail stocks to buy according to hedge funds.
Etsy, Inc. (NASDAQ:ETSY) has announced its results for Q3 2022, and its consolidated revenue came at $594.5 million, exhibiting 11.7% growth against Q3 2021, with the take rate of 19.8%. The company ended Q3 2022 with $1.1 billion of cash and cash equivalents and short- and long-term investments. For Q4 2022, it expects GMS in the range of $3.6 billion - $4.0 billion, revenue between $700 million - $780 million and adjusted EBITDA margin of approximately 27%.
On October 10, The Goldman Sachs Group covered the shares of Etsy, Inc. (NASDAQ:ETSY) and gave a “Buy” rating on the stock. It gave a price objective of $130.00 on the company’s stock. Elsewhere, on January 5, Wolfe Research analyst Deepak Mathivanan covered Etsy, Inc. (NASDAQ:ETSY) with a “Peer Perform” rating and fair value range of $80-$150. Analyst believes in the company’s unique value proposition and competitive position, and its profitability profile.
The COVID-19 crisis provided Etsy, Inc. (NASDAQ:ETSY) a significant boost, and its revenue growing in triple digits is a testament to that.
In addition to Ulta Beauty, Inc. (NASDAQ:ULTA), The TJX Companies, Inc. (NYSE:TJX) and Dollar General Corporation (NYSE:DG), Etsy, Inc. (NASDAQ:ETSY) is one of the top retail stocks favored by renowned hedge funds.
According to Insider Monkey’s third quarter database, Etsy, Inc. (NASDAQ:ETSY) was part of 45 hedge fund portfolios, compared to 29 in the last quarter.
ClearBridge Investments, an investment management firm, made the following comment about Etsy, Inc. (NASDAQ:ETSY) in its third-quarter 2022 investor letter:
“Stock selection in the consumer discretionary sector proved a tailwind to performance. Etsy (NASDAQ:ETSY), which operates a number of online marketplaces for craft and artisan goods, delivered second quarter results that demonstrated the company’s pricing power, cash flow generation, and margin upside remain intact. While Etsy is experiencing declines in gross merchandise sales, it is seeing better than expected take rates and improved margins. We believe the company is well-positioned to grow advertising spending on its marketplace, bring in new buyers and strengthen its e-commerce advantages.”
The Kroger Co. (NYSE:KR) is one of the largest retailers in the United States, operating 2,750 grocery retail stores under a variety of banner names. The company’s formats consist of supermarkets, digital shopping options, price-impact warehouse stores, and multi-department stores. They provide an expanded variety of national brand apparel and general merchandise.
Total sales of The Kroger Co. (NYSE:KR) came at $34.2 billion in Q3 2022 against $31.9 billion for the same period of the last year. Excluding fuel, its sales surged 6.4% in comparison to the same period of last year.
The Kroger Co. (NYSE:KR) expects identical sales, without fuel, to be between 5.1% to 5.3% and adjusted net earnings per diluted share of between $4.05 to $4.15. For the full year, it anticipates operating profit of between $4.8 billion - $4.9 billion and EPS between $4.05 - $4.15. It is expected to report free cash flow between $2.3 billion - $2.5 billion. Consistent execution of its go-to-market strategy continues to build momentum because of which it has raised its full-year guidance numbers.
Analysts at UBS Group reduced their price target on shares of The Kroger Co. (NYSE:KR) from $57.00 to $54.00. They gave a “Neutral” rating for the company on December 2.
Morgan Stanley analyst Simeon Gutman upgraded Kroger to “Equal weight” from “Underweight.” The analyst gives a price target of $46. Simeon Gutman believes that a stable backdrop for food at home in 2023, moderating inflation and resilient underlying demand should support the company’s stock.
According to Insider Monkey’s Q3 data, 49 hedge funds were long The Kroger Co. (NYSE:KR). Their stakes were worth $4.12 billion.
Bath & Body Works, Inc. (NYSE:BBWI) is a global leader in personal care and home fragrance, which includes the #1 selling collections for fine fragrance mist, body lotion and body cream, 3-wick candles, liquid hand soap, etc.
Bath & Body Works, Inc. (NYSE:BBWI) reported sales and earnings results for Q3 2022. It saw net sales of $1.60 billion for Q3 2022, exhibiting 5% decline against net sales of $1.68 billion for Q3 2021. However, net sales for Q3 2022 exhibits 46% growth against Q3 2019. Its Q3 2022 results were supported by the company’s focus on innovation and newness, by leveraging its vertically integrated supply chain, and by taking aggressive action to control costs.
Bath & Body Works, Inc. (NYSE:BBWI) forecasts Q4 2022 earnings from continuing operations per diluted share of $1.45- $1.65. For the full year, it expects earnings from continuing operations per diluted share of $3.00- $3.20.
JPMorgan Chase & Co. upped its price target on the shares of Bath & Body Works, Inc. (NYSE:BBWI) from $40.00 to $43.00 on January 3.
According to Insider Monkey’s data, 51 hedge funds were long Bath & Body Works, Inc. (NYSE:BBWI) at the end of Q3 2022, compared to 47 funds in the last quarter.
Target Corporation (NYSE:TGT) provides its customers, referred to as guests, everyday essentials and fashionable, differentiated merchandise at discounted prices.
The company’s Q3 2022 results exhibited continued sales and traffic growth in a challenging environment. Its business saw comparable sales growth of 2.7%, and it saw unit share gains across all of its core merchandise categories. In Q3 2022, its total revenue came in at $26,518 million, up 3.4% year-over-year. Target Corporation (NYSE:TGT) paid dividends of $497 million in Q3 2022 as compared to $440 million last year, up 20% in the dividend per share, partially offset by fall in average share count.
Analysts at Wells Fargo & Company initiated the coverage on shares of Target Corporation (NYSE:TGT) and gave an “equal weight” rating. They reduced price objective for the stock from $170.00 to $142.00 on January 4.
According to Insider Monkey’s data, 52 hedge funds held stakes in Target Corporation (NYSE:TGT) at the end of September 2022, compared to 46 funds in the previous quarter.
Let us look at what Madison Funds, managed by Madison Investment Management, said about Target Corporation (NYSE:TGT) in their fourth-quarter 2022 investor letter:
“Despite having already addressed excess inventories, Target Corporation (NYSE:TGT) reported a disappointing third quarter and further cut fourth quarter guidance. Although sales were slightly better than expected, Target saw a slowdown in discretionary sales. Gross margins were below expectations with higher markdowns, increased shrink, and incremental costs. Long-term, we expect Target to be able to return to operating margins in the 6% to 8% range as inventories return to normal levels as well as seeing a normalization in supply chain costs.”
Ulta Beauty, Inc. (NASDAQ:ULTA) is the largest U.S. beauty retailer and the premier beauty destination for cosmetics, fragrance, skin care products, etc.
In Q3 2022, its net sales grew 17.2% to $2.3 billion against $2.0 billion in Q3 2021 principally because of favorable impact from resilience of the beauty category, retail price increases, and new brands and product innovation. The company’s comparable sales (sales for stores open at least 14 months and e-commerce sales) saw a growth of 14.6% against an increase of 25.8% in Q3 2021. This stemmed from 10.7% rise in transactions and 3.5% growth in average ticket.
Ulta Beauty, Inc. (NASDAQ:ULTA) increased its outlook for the full year. Its net sales are expected to be in the range of $9.95 billion to $10.00 billion and operating margin of 15.5% to 15.6%. Its expects its diluted EPS of between $22.60 to $22.90.
Credit Suisse Group covered the shares of Ulta Beauty, Inc. (NASDAQ:ULTA) and upped their price objective on the company’s to $535.00 on December 2.
On January 5, Argus analyst Kristina Ruggeri increased the company’s price objective to $530 from $455, and maintained a “Buy” rating. The analyst expects that growth is likely to come from its business partnerships, loyalty programs, customer engagement, and its focus on wellness.
According to Insider Monkey’s third quarter data, 54 hedge funds were bullish on Ulta Beauty, Inc. (NASDAQ:ULTA) at the end of Q3 2022, compared to 52 funds in the prior quarter.
In addition to Target Corporation (NYSE:TGT), The TJX Companies, Inc. (NYSE:TJX) and Dollar General Corporation (NYSE:DG), Ulta Beauty, Inc. (NASDAQ:ULTA) is one of the top retail stocks favored by renowned hedge funds.
