5 Black Friday-Related Stocks That Could Benefit From Taking a Stance on Sustainability and Social Issues

Amazon isn’t the only force disrupting consumer goods and retail companies. Consumers, especially millennials and Generation Z, are putting a higher priority on sustainability and social issues when they shop. A handful of companies stand out on this front, which could make them attractive to shoppers this holiday season—as well as investors.

Nine in 10 Gen Z consumers, usually described as those born in 1995 or thereafter, think companies have a responsibility to address social and environmental issues, with millennials sharing their view on environmental issues, according to a report from McKinsey. Companies are taking note since the two cohorts represent an estimated $350 billion in spending power in the U.S. An even broader swath—about two-thirds of global consumers—say they would switch, avoid, or boycott brands based on their stances on controversial issues, according to McKinsey.

“To stay competitive, companies need to transform and investors have to think differently about them. It isn’t the same model of the past,” says Hellen Mbugua, ESG retail analyst at Calvert Research and Management. In fact, consultants like AT Kearney have recommended in past reports on the global consumer that retailers and brands demonstrate their stance on issues and offer metrics for consumers to monitor their performance on these issues as a way to build trust, which the consultant found lets companies charge higher prices.

Just Capital, a nonprofit launched by hedge-fund manager Paul Tudor Jones, polls Americans on what they care most about and then ranks companies on those issues, which currently focuses on treatment of workers, customers, communities, environment, and shareholders. “Companies that are outperforming their peers [on these fronts] are also outperforming more broadly. That is a mind shift investors will continue to see,” says Alison Omens, managing director of programs and strategic engagement at Just Capital.

Here are five companies consumers may encounter on Black Friday or Cyber Monday that scored well on those metrics in Just Capital’s latest rankings and pop up in the top 10 holdings among Morningstar’s universe of sustainable mutual funds.

Hasbro (ticker: HAS)—The toy maker is the top-ranked household goods and apparel company in Just Capital’s rankings and gets especially high marks for its community and environmental efforts. For example, all of the toy and gaming company’s vendor contracts contain a human rights clause and are subject to human rights audits. Hasbro is also tackling plastic, with plans to eliminate more single-use plastics such as elastic bands and shrink wrap by the end of 2022, according to the company.

On traditional financial measures, Hasbro may be approaching an inflection point in growth as efforts to build its digital gaming and non-toy businesses begin to show early signs of success. “Hasbro remains undervalued and capable of delivering mid-to-high single-digit organic revenue growth and high-teens free cash flow per share growth over the next three to five years” according to Daniel Prislin, portfolio manager of the Jackson Square Large Cap Growth strategy, which owns the stock.

Nordstrom (JWN)—The retailer’s labor practices tend to weigh down their rankings broadly, but Nordstrom scores better than its peers in all of Just Capital’s categories, including workers, with better-than-average scores in terms of pay practices. Nordstrom is also especially strong in its community and environmental initiatives, with diversity and veteran supplier policies and setting quantitative environmental targets, like reducing its energy use a square foot by 15% by 2020 from 2014 levels.

As shoppers move toward re-commerce—renting or reselling clothes—Nordstrom is also looking to capitalize on that trend, creating kiosks for Rent the Runway pickup and drop-off to bring in consumers to the store and convert them to shoppers, says Calvert’s Mbugua.

Target (TGT)—The retailer ranks higher than the industry average for each of the broad categories in Just Capitals’ rankings. Among areas the nonprofit highlights: Target doesn’t ask about criminal records in employment applications and has a team dedicated to focusing on community initiatives. It also publishes a list of its suppliers to offer transparency and reduced water usage at its facilities by nearly 14% since 2010.

The company is also well-placed to keep gaining share as other retailers, including midtier department stores, close, according to a recent note from KeyBanc Capital Markets analyst Edward Yruma. A shorter holiday shopping season also helps omnichannel retailers like Target since there is less time to ship gifts, writes Yruma, who has a $130 price target on the stock. Another possible benefit: Its push into online ordering and store pick-ups, which Yruma describes as a differentiator.

TJX ( TJX )—The off-price retailer, which includes TJ Maxx and Marshall’s, ranks below the retail industry average in terms of wages paid, based on Just Capital’s research, but scores ahead of peers on community and environmental initiatives. And while it may have work to do on the wage front, Calvert’s Mbugua notes that it provides educational assistance for employees. The company also helps reduce what goes into the landfill by taking the unsold inventory from departments and trying to sell it. The company has also used its large real estate footprint to reduce its carbon footprint, cutting energy costs by $36 million between 2011 and 2018.

In a note to clients, Nomura analyst Michael Baker wrote that TJX was well-positioned to capitalize as department stores swim in too much inventory, and the retailer is well-placed to take more market share. Baker, who has a price target on the stock of $66, also sees its international push nearing an inflection point that could help profitability.

Starbucks (SBUX)—The coffee giant ranks higher than the average for its restaurant and leisure peers on a range of measures in Just Capital’s rankings but does especially well on environmental, worker, and community issues. For example, Starbucks launched a straw-less lid, offers discounts to those bringing in reusable cups, and is on track to ethically source all of its coffee. The coffee chain also offers its employees generous benefits, including tuition assistance, paid parental leave, gender pay equity targets, and actively hires veterans and refugees.

For investors, that means lower turnover and a more engaged staff that knows customers well, increasing retention for both. ”There is a direct connection between employees feeling engaged and connecting with customers,” says Parnassus Fund co-manager Robert Klaber. No company is perfect, but Klaber says Starbucks is among those that has moved quickly to right its wrongs, as it did when it closed 8,000 stores for a one-day racial bias training after two black men waiting for an associate in a Philadelphia Starbucks were arrested—an incident that went viral and sparked protests. Klaber also sees continued strong growth from the company’s continued innovation and digital investments that have set it apart from peers.

Source: Barron’s

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