The 3 Best Retail Stocks of 2018 (So Far)

Retailing is a brutal business even in a normal selling environment. But today's brick-and-mortar giants have to contend with tougher challenges, as consumers increasingly focus on convenience, product quality, and value. Online specialists, meanwhile, stand ready to steal market share from retailers that are stumbling in any of these important areas.

Below, we'll look at a few companies that, by exceeding expectations in the industry, have seen their stocks soar so far in 2018. Read on to see how Five Below (NASDAQ: FIVE), Under Armour (NYSE: UA) (NYSE: UAA), and lululemon athletica (NASDAQ: LULU) are standing out from the crowd of mediocre retailers.

Five Below: Up 48%

Investors love the fact that youth retailer Five Below has a long runway for growth ahead. Management expects to add 125 stores this fiscal year. Steady sales gains at existing locations, along with rising profitability, add weight to the retailer's hopes of building up to as many as 2,500 locations -- from just 650 today. That surging store footprint was the main driver behind last quarter's 27% revenue spike.

There are good reasons to remain cautious about this business, though. Customer traffic slipped last quarter, for example. And CEO Joel Anderson and his team are predicting declining profitability for the rest of the fiscal year as the company goes up against a tough comparison with a prior-year period that was lifted by strong demand for the trendy fidget spinners. Yet, with annual earnings on pace to rise by more than 20% for the fifth straight year in 2018, it's understandable why investors have pushed shares of this retailer higher in 2018.

Under Armour: Up 58%

Under Armour shares were beaten up last year, falling 50% as the former highflier's sales growth hit a wall. Investors were even less pleased to see earnings turn sharply lower due to a mix of price cuts, reorganization charges, and investments into the digital sales channel.

Things are looking better so far in 2018. Under Armour's latest quarterly report showed stability in the core U.S. market after many consecutive quarters of painful declines. Yes, profitability is still shrinking, but that trend is improving as Under Armour's retailing network has finally worked through its excess inventory.

Investors are hoping that Under Armour can follow along in Nike's big footprints. The sports apparel titan recently returned to significant sales growth while expanding its profit margin and forecasting an even better year ahead. Industry conditions might support a similar rebound for Under Armour, but only if the retailer can release a steady stream of innovative products, as Nike has done in the past six months.

Lululemon: Up 60%

Buyers of Lululemon stock get to own a business that's firing on all cylinders right now. Sales soared past management's forecast in the fiscal first quarter, rising 19%, compared to the 11% increase that executives had predicted. Prices are jumping, too, as Lululemon's latest product introductions resonate with yoga fans. And rather than driving profitability lower as at rival retailers, Lululemon's surging e-commerce sales are actually boosting its operating margin today. The online channel improved to 16% of total sales last quarter from 12% a year ago.

Lululemon hasn't yet found a permanent CEO after Laurent Potdevin abruptly resigned in February. But investors don't seem to be concerned about the upcoming leadership transition. After all, the retailer appears to have the assets -- including a strong brand, quality products, and a winning operating approach -- it needs to help management hit its goal of $4 billion of annual sales by 2020. That would be quite an improvement from the $275 million of revenue the yoga apparel specialist booked back in 2008.

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Demitrios Kalogeropoulos owns shares of Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool owns shares of and recommends Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool recommends Five Below and Lululemon Athletica. The Motley Fool has a disclosure policy.