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An Uncertain Holiday Shopping Season Ahead

We think these two retail stocks are in the bargain bin.

Editor’s note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.

David Swartz: Like the rest of the year, the 2020 holiday shopping season promises to be filled with uncertainty and anxiety. The COVID-19 pandemic has caused an economic shock and disrupted normal shopping patterns throughout the year as physical stores have been forced to close or limit visitation, while online shopping has skyrocketed. Now, the rising number virus cases in the United States, Europe, and elsewhere threatens to bring new restrictions and further stress to the economy.

In response, retailers and consumer products companies have prepared for a longer selling season in which e-commerce is a top priority and discounts are the norm. We have seen a huge divergence this year in the performance of retail stocks, as some have been crushed, while others have soared to new all-time highs.

One retail stock that's not yet fully recovered from the downturn is no-moat Kohl's (KSS), which has dropped from about $50 at the beginning of this year to about $27 today. We rate Kohl's at 4 stars, and it trades at a roughly 30% discount to our fair value estimate of $38.50 per share. Kohl's has faced big challenges from the pandemic, but it produced about $4.5 billion in e-commerce last year and should benefit from problems of rivals like JCPenney. While Kohl's has reported loss this year, it was consistently profitable before the pandemic, and we expect profits going forward. We forecast Kohl's will earn over $3 per share in 2022.

Another stock to consider this holiday season is narrow-moat Mattel (MAT), the producer of popular toys like Barbie and Hot Wheels. At about $14, Mattel trades at a 30% discount to our fair value of estimate of $20 per share and is rated 4 stars. In response to industry turmoil and poor results, Mattel has reshaped its operations to improve its profit margins and eliminated about $875 million in annual expenses. By the middle of this decade, we forecast it will achieve annual operating margins of about 14% from less than 10% today and sustainable gross margins of about 50%. We forecast that Mattel will earn more than $1 per share in 2023.