Best Buy, Five Below, Pier 1: 3 Of Loop's Favorites In Specialty Hardlines Retail Sector

Loop Capital’s Anthony Chukumba picks Best Buy Co Inc BBY, Five Below Inc FIVE and Pier 1 Imports Inc PIR as his favorites in the specialty hardlines retail sector in 2017. Chukumba also projects the year as another “stock picker’s market” for the group given the widely diverging prospects.

A Look Forward

“As we ponder the year ahead, we believe the U.S. macroeconomic backdrop is generally favorable for specialty hardlines retailers, including rising consumer confidence, falling unemployment, a relatively stable personal savings rate, and a strengthening housing market,” Chukumba wrote in a note.

On the valuation front, the analyst said specialty hardlines retailer valuations remain fairly inexpensive due to relatively low square footage growth prospects and growing investor concern with e-commerce disintermediation.

Headwinds

Chukumba also warned that the ongoing shift to e-commerce will hit retailers in the form of gross margins and heavy investments, forcing many of them to reassess the size of their respective “brick-and-mortar” store bases.

Another key headwind for retailers in 2017 is likely to be wage inflation. The minimum wage increased in 20 U.S. states and the District of Columbia at the start of 2017, with increases ranging from $0.05 to nearly $2.00/hour. The move will benefit 4.4 million employees across the United States, with majority of those working in the retail industry.

But, the analyst says that retailers appear to have “dodged a bullet” with the November 2016 delay of the Fair Labor Standards Act.

Meanwhile, Chukumba believes the two 2017 macroeconomic “wild cards” are the impact of rising interest rates and Trump’s business policies including his import tariff proposals.