The retail world has been thrown into chaos by the supply-chain woes caused by the pandemic.
Retailers normally order based on past behavior, adjusted for new trends. In 2022, however, what happened in the past hardly matters because consumers spent the prior two years largely in lockdown, reopening, and occasional quarantine.
in 2020 and 2021 Americans spent a lot of time at home, which means they bought a lot of TVs, furniture, exercise equipment, board games and puzzles.
That trend could continue into 2022's holiday season, but now people are more likely to spend more time outside their homes, which creates demand for an entirely different set of items.
So, you can see why retailers like Target (TGT), Walmart (WMT), and Amazon (AMZN) might have some inventory problems.
Those retailers, however, are the giants of the industry and having too much of something simply means thinner profit margins for a quarter or two, Target, for example, has been discounting certain television models because it has too many of them after it misjudged demand.
All three of these companies are long-term buys -- but they may not be where the real value is.
A number of below-the-radar retail chains have struggled but have strong long-term prospects. It may take a few years, but these are top-tier investments that are all off at least 20% over the past 12 months, giving them plenty of room to grow.
Image source: The Washington Post / Contributor via Getty Images
Two Top Retailers for Your Portfolio
Five Below (FIVE) offers a fun variation on a dollar store. It sells a wide range of items ranging from electronics and sports gear (think yoga mats, basketballs) to candy and drinks. It also has school supplies and household essentials with nearly all its merchandise costing $5 or less (hence the name).
The Philadelphia retailer has managed to be a heavy discounter without having the negative connotation of being a dollar store. The stores are fun to visit, places kids want to go with their parents -- and mom and dad can escape without spending much money.
Five Below has seen its share price drop more than 38% over the past 12 months, hurt by the general negativity toward retail stocks, not by weakness in its business model.
The steadily growing company added 35 new stores in the first quarter, giving it 1,225 in 40 states. It also saw net sales rise 7%, but comparable-store sales eased 3.6% due to lapping a quarter, where its numbers were very high due to the ending of pandemic-related restrictions.
Earnings per share dropped to 59 cents from 88 cents a year earlier, attributable to higher fuel costs, rising wages, and general supply-chain issues.
Ollie's Bargain Outlet (OLLI) may be the best retailer few people ever seem to talk about.
It's a heavy discounter, like Big Lots (BIG) or closely held Ocean State Job Lots, but uses a much more compact retail model.
It's also a company that has turned its customers, the so-called Ollie's Army, into its marketing arm. When the chain expands -- and it has steadily done so -- it does not need to market the new stores. Its customers do that for them, with many locations having a built-in fan base of people who had been traveling to another location.
Shares in the Harrisburg, Pa., company have dropped 23% over the past year, but again, that's not because the company has faltered. Instead, Ollie's has been the victim of its own success as during the pandemic the company shifted to selling items like groceries and household goods that people desperately needed.
That led to a predictable drop in year-over-year sales (10.1%) and comparable sales that "decreased 17.3% from the prior-year increase of 18.8%," the company said in its first-quarter earnings release. Chief Executive John Swygert explained what happened:
"We were pleased with our first quarter results given that we were up against headwinds including strong stimulus-induced sales a year ago, cooler weather, which impacted sales of our seasonal products, and a consumer faced with significantly higher inflation, particularly on gas and food," he said.
"Our current sales trends have improved meaningfully in the second quarter, fueled by increased demand for warm-weather seasonal products, combined with our incredible deals and strong inventory position."
Why Ollie's and Five Below Are Set for Success
People who have financial concerns and people worried about the economy go looking for deals, and both Ollie's and Five Below can serve those customers.
In some cases, however, someone trading down, so to speak, may return to higher-end retailers when the tough times (or the perception of tough times) passes.
That won't happen to Ollie's and Five Below, as both are destination "treasure hunt" shopping. It's fun to go to either chain as both offer a mix of standard "you need these" items and rotating selection of "you want this" deals.
Both retailers may struggle with margins while supply chains remain challenged, but they should be able to fix that in the long term while adding to their already large and loyal customer bases.
