Consumption spending is the key growth driver for the U.S. economy. Within consumption spending, retail sales are an important catalyst for GDP growth. Given this fact, some large retailers have been evergreen stocks in the last few decades.
However, with macroeconomic and inflationary headwinds, retail stocks have been relatively subdued in the last 24 months. In my view, that’s likely to change relatively soon. With inflation gradually cooling and sluggish GDP growth, multiple rate cuts might be on the cards.
My view is underscored by the fact that retail sales increased by 3.6% in 2023 on a year-on-year basis. For the current year, retail sales growth is expected in the range of 2.5% to 3.5%.
However, impending expansionary monetary policies will boost consumption spending as the cost of money declines. That will likely translate into an acceleration in revenue growth. At the same time, lower inflation will positively impact key margins. It’s, therefore, a good time to consider exposure to the best retail stocks for explosive returns.
Target (TGT)
In the last 6 months, Target (NYSE:TGT) stock has surged 61%. I believe the rally from oversold levels will continue with TGT stock trading at an attractive forward price-earnings ratio of 18.3. Further, the stock offers a dividend yield of 2.59%.
For Q4 2023, Target reported a 4.4% decline in comparable sales. However, comparable sales and traffic trends improved sequentially for the second quarter in a row. The company has also guided for a modest increase in comparable sales for the current year.
Clearly, key business metrics have been improving, and as operating income swells, TGT stock will trend higher. I must add that Target invested $4.8 billion last year towards new store openings and remodeling of existing stores. The company has also been adding new products for its own brand. These investments will support growth, as easy money policies boost retail spending.
Best Buy (BBY)
Best Buy (NYSE:BBY) stock is among the retail stocks that have remained subdued for an extended period. When the breakout comes, it will likely be ferocious for the stock that trades at a forward price-earnings ratio of 13.2. Further, BBY stock offers an attractive dividend yield of 4.69%.
In terms of positives, there are two points to note. First, Best Buy reported a decline of 7.1% in domestic comparable sales change for 2023. Even international comparable sales declined by 3.2%. For the financial year 2025, the company guided for a comparable sales decline of 1.5% (mid-range). Therefore, the outlook is positive for the coming quarters.
Further, Best Buy has focused on opening smaller outlets that sell used and refurbished electronic products. That has supported the expansion of domestic gross profit rates. Further, as the company increases its paid membership base, its operating margin will likely improve.
The Home Depot (HD)
Backed by positive business metrics, The Home Depot (NYSE:HD) is another retail stock to buy. HD stock has trended higher by 25% in the last 6 months. However, valuations look attractive for further upside.
In recent news, Home Depot announced the acquisition of SRS Distribution for an enterprise value of $18.25 billion. The latter is a residential specialty trade distribution company. With the acquisition, Home Depot believes its total addressable market will swell to $1 trillion.
For 2023, Home Depot reported a sales decline of 3% on a year-on-year basis to $152.7 billion. For the same period, comparable sales declined by 3.2%. However, for the next fiscal, Home Depot has guided for sales growth of 1% and a possible decline in comparable sales by 1%. Further, operating margin is expected at 14.1%. With the recent acquisition, that boosts the addressable market, I expect healthier numbers in the coming years.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.