Some investors like to buy what they know, betting that by other people will like what they like and that the companies that sell those products will perform well, but retail is a complicated sector.
Investing in the stock market is always a risk and retail stocks can be particularly volatile. They frequently move with the economy – company performance and share prices often go up when the economy is strong. However, not all retail stocks improve when the economy is good and sometimes shares will perform well even when times are tough.
Pros and Cons of Investing in Retailers
Investing in retailers comes with a variety of pros and cons. Make sure that you understand how these risks and opportunities impact the industry as well as the problems that individual companies may face.
There are tons of things that can impact retail stock performance. These companies need to accurately forecast trends and demands. If they make or buy too much of something and it doesn’t sell, they have to eat those costs.
Over time, if they continue to buy products that don’t sell or that don’t attract shoppers, they could lose market share. In addition, they also have to take pains to make sure that they receive new stock and replenishments in a timely fashion and that they can get those items out into the stores where customers can purchase them.
The risk here is pervasive for brick-and-mortar locations as well as online shopping, which brings its own challenges. Order fulfillment, website development, and maintaining the security of the whole system is paramount, yet failures are still frequent.
Further, retail shoppers have many possible complaints – some of which the retail company may not be able to anticipate, such as kitchen towels that don’t wash well, the ability to sell the desired product at a reasonable price, or a product that ultimately fails. Recalls and security breaches are expensive to manage, and they risk customer loyalty in the process.
That said, there are many reasons to be encouraged about retail stocks as a whole and consumer goods stocks in general. The amount of disposable income people have is improving. In turn, the people (as a whole) have more money to spend on goods.
Also, hundreds of thousands of consumers shop online at least occasionally (i.e., over 215 million in 2017)- and that’s just in the United States! This means that even small companies have larger potential markets than they would have without online shopping.
Let’s look at Costco and Target [NYSE: TGT] in greater detail. The more you understand these businesses, the better you can decide whether investing in one (or both) of them is right for you.
Is Costco Stock a Buy?
Costco [NASDAQ: COST] is a warehouse membership club. At the end of 2018, the company had 762 locations around the world. Consumers have to have a membership to shop there so the company benefits from sales as well as membership fees. In 2018, Costco had 94.3 million members – up from 90.3 million in 2017 and 86.7 million in 2016.
The warehouse format also means that the distribution hierarchy is very low. The company saves money on having fewer steps between ordering items and getting those things in front of customers.
For instance, in some cases, Costco [NASDAQ: COST] accepts the delivery of goods straight to its warehouse locations, thus removing the need to pay for storage of the items or even putting much effort towards displaying them.
Costco customers shop there for the cost savings, not necessarily the atmosphere.
Costco [NASDAQ: COST] sells mostly food (both perishable and shelf-stable), cleaning supplies, health and beauty products, electronics, and appliances. Many of its products come in very large sizes.
The company also stocks apparel and bakery goods as well as premade meals. It has ancillary businesses as well, such as pharmacies, hearing aid centers, and gas pumps. Keeping prices low will help keep demand high. To this end, Costco sells many items under its own private brand, Kirkland signature.
Costco’s main strategy is to keep prices low and locations convenient. The company is currently focused on growth and so far, it is paying off. Membership numbers are increasing. However, growth comes with risks.
Expansion costs money and not every new location will be successful. In some cases, a new Costco warehouse could end up cannibalizing members from another location. There is always a chance that the warehouse membership model doesn’t catch on, for whatever reason.
Should You Invest in Target Stock?
Target [NYSE: TGT] is very different than Costco [NASDAQ: COST]. For one, it is not a membership club. It is more like a department store. Target positions itself as a one-stop-shop for everything from groceries to clothing, household items to toys and electronics.
Its primary means of differentiation is through the assortment of products it sells and its marketing efforts.
It also has a variety of private brands (e.g., Boots & Barkley, Market Pantry, Threshold) and exclusive licensing deals (e.g., Hearth & Hand with Magnolia, DENIZEN from Levi’s, Umbro for Target).
These labels often mean higher margins for Target, lower prices for consumers (compared to national, stand-alone brands), or a combination thereof. The company also has several creative partnerships that help boost business. For example, many locations have a Starbucks in the front of the store.
Target has been focused on its online efforts. The company tries to provide customers with an omnichannel experience that is very trendy.
While Target [NYSE: TGT] has done well in forecasting many trends and being prepared with the right goods at the right price to fulfill those needs, trafficking in trends is risky because they can change on a dime.
The company needs to be able to respond quickly to customer preferences or see its profits erode from spoilage, shrinkage, and markdowns.
Costco Vs Target Stock: The Bottom Line
There are plenty of reasons to be encouraged about investing in retail stocks, but you have to pick the right ones. Costco [NASDAQ: COST] is a membership company first and foremost while Target [NYSE: TGT] is a low-cost, trend-focused department store. These defining characteristics could help or hinder either company in the years to come.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.