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The massive gains that retail stocks experienced during the pandemic were lost last year as the cost-of-living crisis capped spending exponentially. However, the retail industry could reverse its losses and experience an uptrend this year. So, I’m looking for stocks to buy, and these two stocks stand out to me.
Supply chain problems are alleviated
In addition to sky-high inflation hurting consumers’ pockets, e-commerce and retail chains also had to deal with dire inventory problems last year. Retailers over-ordered before an economic slowdown and were left with a ton of inventory they couldn’t get rid of. Combine this with higher freight costs and it was no surprise to see bottom line disaster for many companies.
That said, the tide could be turning, according to Peter Garnry, Saxo’s director of equity strategy. The analyst cites three reasons why he is optimistic about the sector:
- Container freight rates and supply chain delivery times have been normalized. This improves profitability and customer satisfaction.
- Discretionary spending in Western households is much stronger despite inflation and lower real income. Consumer companies surprised by revenue growth in the latest earnings season.
- Cost reduction among e-commerce businesses will significantly improve profitability this year. Online advertising prices have also dropped.
Amazing ASOS
Some of Garnry’s forecasts have proven true so far, especially with ASOS (LSE:ASC), which provided a trading update last week. The shares fell 72% last year due to excess inventory and a shrinking balance sheet.
However, ASOS’ share price is now up 40% since the start of the year, buoyed by a better-than-feared update. In the statement, CEO José Calamonte presented the group’s 12-month restructuring plan, which resonated strongly with shareholders.
- Improve inventory management.
- Simplifying and reducing costs.
- Construction of a solid and flexible balance sheet.
- Strengthen management and refresh the culture of the company.
These factors, combined with the removal of excess inventory and £300m worth of profit optimisation, could see the bottom line for growth stocks improve over time. After all, the board expects to see a return to profitability and positive free cash flow by the end of its fiscal year. As such, a further increase in its share price remains possible.
next in line
Another stock I’m looking to buy is NEXT (LSE:NXT). Like its peer, its shares fell in 2022, dropping 35%. But it’s also made a bit of a comeback this year after a stellar third-quarter update that beat analyst estimates. NEXT stock price is now up 10% in 2023 alone.
Additionally, the conglomerate updated its profit guidance for fiscal 23 as it now anticipates pre-tax profit to be £20m higher, to £860m.
Having said that, the guidance for the following year took a hit as the FTSE 100 Stalwart expects full-price sales to fall 1.5% due to restricted discretionary spending. This would reduce pre-tax profit by 7.6% to around £795m. Even so, margins should improve as costs begin to ease heading into the spring and summer seasons.
As long as shipping costs continue to decline, the path to margin expansion remains possible, making NEXT stock lucrative for me. After all, the company is going ahead with its share buyback program, demonstrating the confidence of experts that a rally from current levels is possible.
