The Biggest Trends in Retail Stock Investing: 2015

Retail stocks have unrivaled exposure to consumers and discretionary income. For better or worse, that means that retail stocks will always be sensitive to changing consumer tastes. That's why, in retail, choosing a stock that is on the right side of major consumer trends is just as important as fundamental analysis.

You should try to have your finger on the pulse of where the consumer is going next. Only then can you choose which stocks are heading in that direction as well. Here are the three biggest trends in retail for 2015, and a few stocks that may be poised to profit from them.  

Rising wages

Sometimes, the most important thing a retailer can do is win a customers conscience. After years of scrutiny over poor treatment its employees, Wal-Mart is looking to change hearts and minds.

Wal-Mart CEO Doug McMillon recently announced that by April, the retail giant would raise minimum wage for associates to $9.00 per hour, and $10.00 per hour in 2016. Since then, TJX Companies, Target, and others have followed suit.

All of the retailers have said publicly that the higher wages will hurt earnings in the short-term. What they are betting on is that the reduced turn-over, and higher staff productivity, will result in long-term savings. They also believe that customers will feel better about their shopping decision and receive better customer service. For Wal-Mart, this decision was as much about damage control as it was about growth. It is still the right decision. It is likely that more retailers will follow suit and that the trend of higher wages will continue throughout 2015. 

Organic everything

The best investments are made when a great stock meets a game changing trend. Is anything as "game changing" as the organic and natural food movement? Even stodgy old companies like Wal-Mart, Campbell Soup, and Kroger have converted. That said, organics likely won't move the needle much at these companies.  

Organic shoppers tend to be well educated, with high discretionary income. In general, they care more about where they buy from than price. So, while it's not a bad idea for Wal-Mart to offer organic products, it likely won't be a growth avenue. Seek out the first movers in this category, grocers such as Whole Foods and manufacturers like Hain Celestial.

Organic food sales are projected to grow 13%-18% through 2018, but they still only account for 4% of total food sales. With organics making up such a small percentage of food sales, this trend could run for years to come. 

There's plenty of room for all of the stocks listed to eat, but if these trends continue, the first movers will reap the biggest rewards.  

Big-Box goes small

It appears that Big-Box giants Target and Wal-Mart have made a new years resolution to slim down. Target opened its first TargetExpress store in 2014, a 20,000 sq. foot concept built for cities, and it plans to open more this year. Wal-Mart's "Neighborhood Market," a smaller 38,000 sq. ft grocery format, competes with grocery stores and convenience stores alike. Neighborhood Market has grown rapidly in recent years, and Wal-Mart plans to open 200 more stores this year. 

Wal-Mart has also tested convenience store concepts that are smaller than 12,000 sq. ft, branded Wal-Mart Express and Wal-Mart to-go, in select locations. 

The idea behind the slim-down is two fold.

  1. Big-Box chains are running out of suburbs that can support new super stores. Meanwhile, as many affluent customers are moving back into cities, the smaller format stores present a rare growth opportunity.
  2. Some customers just don't want to walk through a Wal-Mart superstore to get a pack of batteries. By offering a smaller format, both chains are hoping to cash in on sales that would otherwise go to dollar or convenience stores. 

How far this slim-down trend goes will depend largely on how successful the first stores are. So far, only Wal-Mart's Neighborhood Market format has taken off. 

Retail is always changing, because customers are always changing. It seems likely that these trends will continue beyond 2015. However, as a retail investor, you should try to think like a customer. When you've lost interest in a product or trend, do a little homework, it might be that it has run its course.