3 Retailers For Dividend-Growth Investors In 2021

Retail (NYSEARCA:XRT) has been one of the hottest and most unexpected trends of the pandemic. The shut-downs forced us to stay home, in response we spent our travel and leisure money on stay-at-home consumer goods, and there has been nothing but positive tailwinds since. The number one tailwind was economic stimulus but even that was only a boost to trends that were already in place. The trend I speak of is labor market improvement, a trend that has resumed in the wake of the summer’s economic reopening.

The American consumer was very healthy before the pandemic began because jobs were abundant and wages were rising. When the pandemic struck the American Consumer didn’t wither and die. While some were hurt badly by it many others adjusted to the new life kept on working and banked a lot of the stimulus. Or else used it to upgrade their lifestyles which ultimately means spending money and greasing the economic wheels.

Now, with unemployment down more than 50% from the summer peak and expected to shed another 3% to 4% over the next two quarters there are new tailwinds arising for both the consumer and the retail sector. These come in the form of renewed stimulus and a vaccine-supported reopening that will only spur retail spending to new heights.

Tractor Supply Company Is A Household Name

Tractor Supply Company (NASDAQ:TSCO) is not a small business but it is one that failed to garner much spotlight. Perhaps it’s the name, Tractor Supply Company because this company is closer to a high-tech general store than it is to a tractor dealership. That all changed when the pandemic struck. The company reported high-double-digit increases in revenue that were driven by both customer growth and ticket averages that are expected to remain sticky into the coming years. The growth will be supported by store expansion as well, expansion into underserved and more-rural areas where Target and Walmart have yet to venture.

In terms of dividend, Tractor Supply Company doesn’t deliver much in the way of yield, it’s a little less than 1.15% with shares at $143. That said, there is absolutely nothing not to like about the payment and the outlook for future distributions. The company is only paying about 24% of the consensus earnings and the balance sheet is a fortress. The company is carrying some debt but coverage is very high, leverage is running <1X FCF, and the $1.4 billion in operating cash flow is relatively unencumbered. Along with that is a positive outlook for distribution growth. Tractor Supply has been increasing for 10 years with a 17% CAGR.

BJ’s Wholesale Club Is A Deep Value Growth Story

BJ’s Wholesale Club (NYSE:BJ) doesn’t pay a dividend but that is the only bad thing I can say about the stock. The company operates a chain of wholesale membership clubs that, quite frankly, is trading at a ridiculously deep value. The stock is trading about 12X its this year’s earnings where the 2nd cheapest comparable stock, Walmart, is trading closer to 25X earnings. Pricesmart is trading closer to 33X and Costco 37X which all imply BJs deserves a higher multiple for its roughly 18% YTD growth.

Looking at the charts, this stock may be getting ready for a multiple expansion. Price action appears to be forming a bottom at a key support level near the $36 level. Resistance is at the short term EMA and represents a 15% discount to the current analyst’s consensus. A move in the price above the EMA would be a bullish movement.

Big Lots Is Still A Big Value

Big Lots (NYSE:BIG) is one of the most surprising deep-values on the market and more so because the value has persisted for so long. The company is riding not only a wave of pandemically inspired shopping but is also benefiting from an ongoing long-term turnaround plan. Called Operation Northstar, Big Lots has been making its stores more accessible and user-friendly while trimming costs and focusing on eCommerce.

Trading at only 5.75X this year’s earnings and paying a safe 2.7% dividend Big Lots is one of the most attractive dividend stocks in the sector. Big Lots dividend is safe too. The company has a history of increases as well but hasn’t made one in several years although it could at any time. Not only is the payout ratio a very-low 15% but the company has very little debt, a very large cash pile, and generates strong free-cash-flow.

Read This Story Online

Analysts Are Leading Levi Strauss Higher

Levi Strauss (NYSE:LEVI) did not have a great year despite the strong rebound that is already underway. The company saw its revenues decline more than 60% in the 2nd quarter of the year and they have yet to regain the pre-COVID levels. And yet the analysts continue to warm up to this stock. Not because it is such a pandemic winner, it certainly isn’t that, but because it is set up to win in the post-pandemic world. The company has a great brand with global recognition, it’s making big strides into the eCommerce/direct-to-consumer arena, and the brick&mortar locations that it relies on are on the brink of a major, vaccine-supported reopening.

eCommerce Underpinning Results For Levi

eCommerce is not only helping Levi Strauss recapture lost revenue but it is juicing the bottom line as well. On a net basis, eCommerce sales improved 52% YOY in the 3rd quarter and drove a 60 basis point improvement in gross margin. This is important to note because many retailers/manufacturers relying on eCommerce have seen their margins squeezed by higher costs in the DTC channels. The takeaway is that eCommerce will not only aid growth as the company moves forward but that it will also leverage earnings.

CFO update, Q3 earnings report "The strength of the Levi’s brand is demonstrated in our gross margins, and revenues have been recovering from COVID-19 related disruptions faster than expected, driven by e-commerce, international and our women’s business, particularly within Europe and in the United States. Inventory is healthy headed into holiday, we are making investments in our digital transformation, and our cost and working capital actions have put us on a clear and accelerated path to achieving our adjusted EBIT margin 'North Star' of at least 12% when revenues recover to pre-COVID levels."

The Analysts Like What They See In Levi’s

The analysts like what they see in Levi’s despite the impact of the pandemic. Over the last 180 days the company has turned the few analysts sitting on the fence into bulls and they are driving the shares higher. The consensus target for Levi’s has risen $2.00 or more than 10% and this trend is not over. Guggenheim is only the latest bull to issue a price target increase and that a stout $4.00 to $24 or about 26% upside. Since the 2Q report was issued the stock has gotten 7 nods from the analyst community include 3 upgrades and 7 price target hikes.

The most impactful upgrade came from Goldman Sachs. The analysts at Goldman Sachs switched from bear to bull raising the rating from sell to buy and setting a target of $23. According to them, Levi’s is delivering on several initiatives including the DTC channels that promise to drive increased sales, higher margins, and EPS growth. The analysts at Bank of America echo that sentiment calling out the stock as an underappreciated COVID-recovery story with underlying brand strength.

The Technical Outlook: Levi’s Broke Out, New Highs Are In Store

Shares of Levi’s made a stunning recovery led by the analysts and their upgrades. The stock gained nearly 85% before hitting its peak and has since retreated back to a firmer level of support. Now, with the analyst’s sentiment coming to a boil, the stock looks like it could retest the recent high if not set new highs very soon. In the near-term, price action may continue to falter and/or test support near the 30-day EMA. The indicators are bearish and suggest price weakness will continue. That said, so long as the price action remains above the EMA the uptrend is intact and falling indicators a good thing.

Read This Story Online

Penn National Gaming (NASDAQ: PENN) Still Has Room to Run

The recovery seems shocking at first glance. The casino industry was decimated by COVID-19, after all. Companies like Las Vegas Sands (NYSE: LVS) and MGM Resorts (NYSE: MGM) have struggled mightily.

Penn’s Casinos Have Taken Less of a Hit

Penn had an abysmal second quarter, which isn’t too surprising given that Q2 was generally the worst quarter for companies that rely on physical locations. Revenue dipped 77% yoy to just over $300 million and EPS came in at a loss of $1.69 a share vs. a profit of 44 cents a share in the year-ago period.

In Q3, however, Penn’s revenues recorded a massive sequential improvement; at $1.13 billion, they were down just 16.3% yoy. EPS was more impressive – a profit of 93 cents a share, up 144.7% yoy and blowing away consensus estimates of 48 cents a share.

How was Penn able to recover so quickly?

Penn’s casinos are regional, drive-in properties, as opposed to international destinations. This means that customers don’t need to fly to go to Penn’s casinos. A massive advantage in the midst of the pandemic.

This advantage should persist for some time, as international travel may not fully rebound in 2021. Domestic leisure activities, on the other hand, may benefit from pent up demand in 2021 and exceed 2019 levels.

But That’s Not the Best Part About Penn…

The casino recovery and outlook are nice to see, but what should have you really excited about Penn is its foray into sports gambling – it’s going about as well as you could expect.

Penn realized that it didn’t have several years to build a powerful sports brand in an emerging and fast-growing space. So it bought a stake in Barstool Sports, which has 60+ million monthly active users and 100+ million social media followers. The deal gives Penn access to Barstool’s customer list and exclusive advertising rights for 10 years on the Barstool Sports platform.

The early returns have been encouraging. In September, Penn and Barstool launched Barstool Sportsbook, but just in the state of Pennsylvania. “It was the No. 1 most downloaded sports betting and sports app in the country during its first weekend despite only having launched in one state.” On top of that, Penn spent very little on external marketing. Barstool’s millions of fans did all the work.

What is possible once Penn expands and does some external marketing?

You won’t have to wait to find out. Penn is now launching Barstool Sportsbook in Michigan and Indiana, and plans to continue expanding moving forward. Sports gambling is legal in around half of the US states, and that number should only grow in the coming years.

As for marketing, Penn plans to take an innovative approach to it. The company’s push to save the historic Reading Terminal Market in Philadelphia offers an example. On the Q3 earnings call, CEO Jay Snowden said, “They had a GoFundMe campaign under way to help sustain their operations but haven't quite met their goal. Dave and Penn stepped up together and agreed to contribute $100 for every $100-plus new account opened on our Barstool Sportsbook app in a 24-hour period. We ended up raising over $150,000 for the Reading Terminal Market to help them complete their goal.”

This type of marketing doesn’t always offer a clear-cut ROI, but it is often very effective. Many people – particularly millennials – care about the values of the companies they do business with. Positive publicity can, in many cases, create more long-term customer relationships than bludgeoning prospects with advertisement after advertisement.

How Should You Play Penn?

Penn has a lot going for it. But at 55.3x projected 2021 earnings, there is already quite a bit of growth priced into shares. Is enoughgrowth priced in though? Probably not.

The combination of local casinos and sports gambling puts Penn in an enviable position for both the next year and the next 3+ years. Penn isn’t for the risk-averse among us – there’s no guarantee it will grow into/past its valuation – but the risk/reward is still attractive at current levels.

Read This Story Online