3 Risky Retail Stock Bets That Could Pay Off Big Time

Stocks to buy

As circumstances sit right now, the concept of high-risk, high-reward retail stocks likely favors the bears more so than the contrarian bulls. Let’s be real: while the Federal Reserve has attacked inflation with aggressive interest rate hikes, consumer prices remain stubbornly high. So long as that’s the case, investing in the discretionary retail space will be difficult to justify.

Also, one has to consider that while consumer sentiment is up from its June 2022 lows, it’s below levels seen in April 2020. That’s not a great sign, especially with mass layoffs starting to mount again. At the same time, because so few are expecting retail stock picks to jump higher given the negative backdrop, there’s a possibility of robust returns.

Now, such a proposition is wildly dangerous and some might say irresponsible. However, if you can handle the heat, these are the high-risk, high-reward retail stocks to consider.

Retail Stocks: Best Buy (BBY)

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Is Taylor Swift to blame for the lackluster market performance of Best Buy (NYSE:BBY)? Well, maybe not directly but in a way, the popstar hasn’t helped the giant electronics retailer. According to a Business Insider article, Best Buy CEO Corie Barry identified “funflation” – or spending to gain access to fun experiences – as overshadowing demand for consumer electronics.

And with Swifties willing to pay an arm and a leg to attend the Eras Tour – even if that means profiting ticket scalpers – I can definitely see Barry’s point. But if this dynamic truly is what’s going on here, then BBY could also be one of the high-risk, high-reward retail stocks to gamble on. Basically, the thesis here revolves around a combination of pent-up demand and the seeking of value.

Eventually, Swift will have to end her tour and recuperate. People often forget how demanding all that singing and dancing really is. That will likely open up demand for physical goods, especially as stubbornly high inflation incentivizes a bang-for-the-buck mentality. Thus, BBY just might be an intriguing idea for retail stock picks.

Citi Trends (CTRN)

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A retail clothing chain selling discount products, Citi Trends (NASDAQ:CTRN) primarily targets urban customers. Fundamentally, I’m not particularly ecstatic about the broader clothing and clothing accessory store industry. As data from the U.S. Census Bureau reveals, this segment has been roughly flat since June 2021. As stated above, clothing isn’t exactly where consumers’ hearts are focused right now.

Unsurprisingly, CTRN lost more than 10% of its equity value since the start of the year. At the same time, during the past six-month period, shares gained over 26%. What changed? It’s possible that with more companies demanding a return to the office, worker bees must upgrade their wardrobes. Under this circumstance, discount apparel retailers just might benefit.

On a financial note, Citi Trends’ gross margin on a trailing 12-month (TTM) basis comes in at 38.64%. That’s roughly in line with prior years’ stats, implying robust (or at least stable) pricing power. Therefore, the company could make a case for high-risk, high-reward retail stocks.

Ulta Beauty (ULTA)

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Probably the most treacherous idea for high-risk, high-reward retail stocks to buy, Ulta Beauty (NASDAQ:ULTA) is a popular beauty care specialist. Per its public profile, Ulta offers a chain of beauty stores, carrying a wide range of cosmetics, fragrances, and hair and nail products. In addition, it provides bath and body products. One factor that appeals to shoppers is that each Ulta store also features a beauty salon.

Following the Covid-19 disaster, Ulta Beauty bounced back sharply. While consumers gravitated toward social experiences – hence the funflation argument – they also wanted to look good on their outings. Thus, it wasn’t surprising that ULTA shot higher. However, circumstances have shifted recently. Since the January opener, shares have lost more than 21% of equity value.

Nevertheless, it’s possible that ULTA could redeem itself as one of the retail stock picks. For one thing, the company continues to see revenue growth. Also, its gross margin on a TTM basis is 39.4%, which is right in line with prior years’ trends.

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

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