3 Undervalued Dividend Stocks in Retail

• Undervalued retail dividend stocks are available after the recent selloff.
• Gap (GPS) is a clothing and accessories retailer that operates worldwide.
• Dick’s Sporting Goods (DKS) is a sporting goods retailer that started out as a fishing-focused shop more than 70 years ago.
• Best Buy (BBY) is a leading consumer electronics retailer that operates in the United States and Canada.

Inflation worries and fears about a potential recession have caused many retail stocks to pull back in recent months.

Both low and high quality retail stocks have sold off, which does not seem justified, and which has resulted in buying opportunities in some of these retail stocks.

In this article, we’ll showcase three retail industry stocks that promise attractive total returns over the coming years.

Undervalued Retail Dividend Stocks: Gap (GPS)

Gap (NYSE:GPS) is a clothing and accessories retailer that operates worldwide, although its biggest market is its home market, the U.S. Its brands include Gap, Banana Republic, Old Navy and several more.

The company cut its dividend during the pandemic, but it did not have an overly reliable dividend growth track record in previous years, either. In 2022, however, the company raises its dividend from 12 cents per share to 15 cents per share per quarter.

The company reported its most recent quarterly results in early March. During the quarter, the company saw its revenue rise by 3% year over year, which was better than what the analyst community had expected. The company reported a net loss of 2 cents per share, which also beat estimates.

For the current year, earnings-per-share are expected to come in between $1.85 to $2.05, or $1.95 at the midpoint. Unlike many other retailers, Gap’s strongest quarter is not Q4, but usually Q2, as its product lineup is more weighted toward “summer” wear.

Today, Gap trades at just 5x net profits, which is an incredibly low valuation both in absolute terms and relative to how the company was valued in the past. We believe that a meaningfully higher valuation, at a high single-digit earnings multiple, is justified.

Gap is not a high-growth company, but we still believe that there will be some earnings-per-share growth in the long run. Buybacks will likely play a role in that, as Gap has bought back more than 20% of the company’s float over the last decade.

Going forward, we believe that Gap will generate annual total returns of at least 10%. The dividend yield alone is a little over 6%, and earnings-per-share growth and multiple expansion should at more than 4% a year in the long run, although Gap’s shares could remain volatile in the near term as the market is jittery due to inflation and recession concerns.

Dick’s Sporting Goods (DKS)

Dick’s Sporting Goods (NYSE:DKS) is a sporting goods retailer that started out as a fishing-focused shop more than 70 years ago. Its store concept includes a variety of shops-in-shop, dedicated to team sports, golf, fitness, outdoor equipment and so on.

During the pandemic, when many consumers sought ways to entertain themselves without travel, going to the movies or malls, and so on, Dick’s Sporting Goods performed exceptionally well. Its sales soared, and thanks to operating leverage, earnings-per-share hit new record levels in both 2020 and 2021. It is not surprising that the environment will not remain as great as it was in 2021 for outdoor and sporting goods retailers, which is why a decline in profits is forecasted for the current year.

That being said, Dick’s Sporting Goods should still be very profitable this year. During the most recent quarter, the company reported revenue growth of 7% year-over-year, and its earnings-per-share of $3.64 beat estimates easily. Throughout the current year, comparables will get more difficult, and at the same time, rising inflation will likely put some pressure on Dick’s margins.

Another factor to consider is that consumers will now be more eager to spend on travel, dining out, etc. as the pandemic is coming to an end, which will likely reduce the amount of money they spend on sporting and outdoor products. This will also be a factor in this year’s expected earnings-per-share decline. That being said, earnings-per-share are still forecasted at $12.50, which is significantly more earnings-per-share than the company generated prior to the pandemic.

In recent years, DKS has bought back shares at a rapid pace, repurchasing more than 10% of its float during 2021 alone. We do believe that buybacks will be meaningful in the coming years as well, which should be a tailwind for earnings-per-share going forward.

DKS currently offers a dividend yield of 2.7%, and when we account for the forecasted earnings-per-share growth of 5% a year and the multiple expansion tailwind potential (5%+ a year), 12%+ annual returns could be achievable here.

Undervalued Retail Dividend Stocks: Best Buy

Best Buy (NYSE:BBY) is a leading consumer electronics retailer that operates in the United States and Canada. The company has more than 1,000 retail locations, with around 90% of those being located in the U.S. There used to be operations in Mexico as well, but Best Buy exited that market in 2021. The company has raised its dividend for 19 years in a row, which doesn’t make it a Dividend Aristocrat yet, but which is still a very solid dividend growth track record.

Best Buy’s most recent quarterly results were reported in early March. During the quarter, the company saw its revenue decline by a couple of percentage points, partially due to a tough comparison with a strong quarter in the previous year. The company still generated attractive earnings-per-share of $2.73 for the quarter, well above pre-pandemic levels.

This year, it is expected that profits will decline versus 2021, due to the aforementioned tough comparables. Still, 2022 should be the second-best year in Best Buy’s history, as earnings-per-share guidance is for ~50% growth as compared to 2019, before the pandemic.

Best Buy is not opening a significant number of new stores. Instead, earnings-per-share growth is being boosted by buybacks. Over the last decade, Best Buy has bought back around one-third of its share float. With buybacks continuing and some tailwinds from growing same-store sales, we believe that an earnings-per-share growth rate of 5% to 6% is realistic in the long run.

When we add the dividend, which currently yields 4.8%, we get to total returns in the 10% range even before accounting for potential multiple expansion tailwinds. Since we believe that the current valuation of around 8.5x net profits is lower than justified, total returns could easily reach 12% a year going forward, factoring in some upside potential to Best Buy’s valuation.

On the date of publication, Bob Ciura did not have (either directly or indirectly) positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.