2 Stocks to Watch in Retail

By Joe TenebrusoFool.com

The retail industry is a dynamic arena. Consumer preferences change, competition is cutthroat, and winners can quickly become losers. But the changing retail landscape can also spawn new success stories, and to the victors -- and their shareholders -- go the spoils.

CVS Health and Casey's General Stores are both successfully navigating these shifting tides. They may not be the businesses that most investors think of when it comes to retail. That's good for us, because sophisticated investors know that finding opportunities in overlooked areas can often lead to outsized profits.

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CVS HealthEvolving trends in healthcare bode well for retail pharmacies. People are living longer, and an aging population generally leads to increased demand for prescriptions and other healthcare services. In addition, healthcare reform is forcing consumers to make more of the decisions related to their own care and also bear more the costs. Many of these more price-sensitive consumers are turning to retail pharmacies for less-expensive access to medical services, which are increasingly becoming the first line of care for many patients.

CVS Healthis helping to lead this charge. Last October, the nationwide chain of drugstores made the bold decision to remove cigarettes and other tobacco products from its more than 7,800 locations. This helped to better position its brand as a leading health services provider.

That's even more significant now that CVS's MinuteClinics have become an important part of its business and a powerful driver of growth. In fact, CVS is now the leading retail medical clinic provider in the United States with more than 900 locations.And CVS expects that figure to surpass 1,500 locations by 2017.

These walk-in medical clinics are located inside select CVS pharmacy stores and offer low-cost and convenient access to an expanding array of basic health services. They've proven to be popular with patients; MinuteClinics have provided care through more than 25 million patient visits, with a 95% customer satisfaction rating.

MinuteClinics also benefit health plans by helping to control costs on routine care. And rather than being a major threat to primary care providers, MinuteClinics often serves as a source of referrals for doctors.

Combined with CVS' core retail pharmacy operations and powerful pharmacy benefit managementbusiness, MinuteClinics are a potent part of CVS' cash-generation arsenal. They helped CVS produce $6.5 billion in free cash flow in 2014, the majority of which CVS passed on to its shareholders in the form of share buybacks and rising dividend payments. Management also isn't afraid to act aggressively by using some of that cash to fund major acquisitions, such as CVS' recently announced deal to acquire Target's pharmacy and clinic businesses for approximately $1.9 billion.

With an aging population driving a need for more accessible and affordable healthcare services, expect CVS to continue to reward its shareholders in the years ahead.

Source: Casey's General Stores

Casey's General StoresGas Stations may seem like an odd place to look for a new investment idea. The industry hasn't changed much in decades, but one company has taken an interesting approach to a boring business.

Casey's General Stores owns and operates more than 1,800 gas station/convenience stores in 14 Midwestern states.

But rather than focusing on the most highly populated areas, Casey's focuses on smaller communities that typically don't have a lot of options for gas or food. In fact, nearly 60% of Casey's stores are in towns of under 5,000, and more than 80% are in communities of less than 20,000.

While that lowers the amount of potential customers that Casey's can serve, it also tends to come with a lot less competition. This focus on underserved communities has allowed Casey's to carve out a successful niche in any otherwise extremely competitive market.

To strengthen that position and add more value to the communities it serves, Casey's has expanded its convenience store offerings to include more grocery and prepared food items, and even offers pizza delivery at some locations. Combined with other initiatives such as extending store hours (more than 100 locations are now open 24 hours), these moves are helping to drive same-store sales growth and improve profit margins.

Rising sales and improving profitability are a powerful formula for long-term success, and that's certainly been the case for Casey's. Over the last quarter century, revenue and earnings have increased at an annual rate of more than 11% and 13%, respectively.

But this growth story still has room to run, with locations in only 14 states and plenty of rural communities still left underserved. That makes today a great time for investors to take a look at Casey's General Stores.

The article 2 Stocks to Watch in Retail originally appeared on Fool.com.

Joe Tenebruso has no position in any stocks mentioned. The Motley Fool recommends Casey's General Stores and CVS Health. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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