Killik: 3 Retail Stock Picks

Rachel Winter from Killik & Co highlights three retail stocks that are defying the odds and offering investor growth opportunities - and even some income

Emma Wall 3 October, 2018 | 11:15AM
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Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and joining me today to give her three stock picks is Rachel Winter from Killik & Co.

Hi Rachel.

Rachel Winter: Good morning Emma.

Wall: So, what's the first of the three stocks you'd like to highlight today.

Winter: Well, we're looking at retail today. Because obviously it's been quite a difficult sector recently. But there are some bright areas that are actually doing quite well. So, the first stock we're looking at is Home Depot (HD). So as an American company it's the largest home improvement retailer in the US. Very, very US focused indeed. But it's actually doing quite well because the US housing market is ticking along quite nicely. We're seeing quite a bit of growth there, but we are also seeing a lot of what we call new housing formation.

So, people are more likely to live on their own or as a couple rather than with their whole families and the grandparents and the great grandparents as might have been the case many years ago. So, they are doing particularly well because of that. And also they do offer quite an experience in-store. So, they are offering things like tiling classes for millennials which have gone down very well. And that has encouraged people to go to the stores and buy more products.

Wall: And how sensitive is that to the US economy and economic growth. Because the US economy has been doing very well in recent years. However, there are signs that could be about to change.

Winter: It is very reliant and actually at the moment I would say that is a good thing. Because they benefitted hugely from Donald Trump's tax cuts. So those tax cuts are aimed at companies that are making all of their revenue in the US and that’s Home Depot. Over 90% of the revenue comes from the US and therefore they have seen a huge boost because of those tax cuts, so we expect the company to benefit from those for many years to come.

Wall: And what's the second stock pick?

Winter: Second one is TJX (TJX). So that’s the owner of TK Maxx. And they are doing very well again because they offer quite an experience. So, they don’t really sell much online. They offer customers a chance to go in and have this kind of treasure hunt to find a good value item and actually customers really like that, and they respond very well to that. But now TJX globally has got nearly 4,000 stores, so actually they have a huge amount of buying power.

And they are actually able to get their stock at very good prices. They are taking on surplus stock from many of the large retailers and actually from a moral point of view I think that’s quite a good thing as well. So we saw earlier this year Burberry got very heavily criticised for burning lots of excess stock. And they have said they are now going to stop doing that. So I think it's probably now more likely that designer businesses will be giving more surplus stock to businesses like TJX.

Wall: TJX has recently embarked on a new advertising campaign. Does this mark an increased marketing spend for the firm?

Winter: It will be an increased spend, yes. But they have got a lot more stores and they are using that marketing to drive more traffic to those stores. And I think really customers are really enjoying it. And also because they are offering this kind of off-price retail, I think it's also a business that could do quite well if the economy does slow down a bit. So if people start trying to spend a bit less I think probably it'd get even more people going to businesses like TJX.

Wall: And what's the third and final stock pick.?

Winter: Last one is Nike (NKE). So, this is one that has done well from online. So, we are now seeing lots more customers buying directly from Nike online. That’s very good for them because in the past they have sold quite a lot through third party retailers and therefore they have lost a bit of margin there in the past. But now more customers are buying direct they are getting to keep more of the profit for themselves. Nike at the moment is by far the largest sportswear company in the world and it's still very much a growing market.

So, it's very fashionable at the moment to be very fit and healthy, to take all these selfies of yourself wearing sportswear in the gym. So, Nike is doing very well from that. And also we have still got this athleisure trend. We have still got people wearing the sportswear outside of the gym and just walking around London today there are so many people just wearing their trainers to work. Wearing their sportswear on the way to work and getting changed when they get there. So, we think very much, this is a growing market with lots of way to go.

Wall: Now we mentioned advertising in the stock before. Nike has been quite famous for its sometimes controversial advertising. Very recently taking a political statement. How much do adverts like this hurt or harm the brand?

Winter: So, I think actually on many occasions being quite controversial has really worked in their favour. Say for example they have recently sponsored Colin Kaepernick who was under fire for not singing the US national anthem. However, I think a lot of consumers are very impressed with Nike for standing up for him and actually I think the sponsorship of him could actually benefit them in the longer run.

Wall: Rachel, thank you very much.

Winter: You are welcome.

Wall: This is Emma Wall from Morningstar. Thank you for watching.


The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Nike Inc Class B92.18 USD0.45Rating
The Home Depot Inc344.21 USD0.43Rating
TJX Companies Inc100.29 USD1.38Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar

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