Retail Sector Price-to-Earnings (P/E) Ratio Insights and Trends in 2021 - Average 64.65 Explained

Charlene Rhinehart, CPA and CFE, chairs an Illinois CPA Society committee and holds degrees in accounting and finance from DePaul University.

When assessing stocks, investors and analysts frequently rely on the price-to-earnings (P/E) ratio, a key valuation tool that compares a company's current share price to its earnings per share (EPS). While P/E ratios are often examined at the individual stock level, evaluating the average P/E across an entire sector offers valuable context to gauge stock valuations relative to peers and aids in portfolio diversification strategies.

Let's delve into the retail sector's P/E ratio landscape, which encompasses companies engaged in selling goods and services directly to consumers.

Key Highlights

• The P/E ratio measures a stock's price relative to its earnings, serving as a fundamental valuation metric.
• Investors use P/E ratios to identify whether a stock is undervalued or overvalued.
• The retail sector is segmented into seven distinct categories: automotive, building supply, distributors, general retail, grocery and food, online retail, and specialty lines.
• As of January 2021, the overall retail sector's average P/E ratio stands at 64.65, calculated by averaging the P/E ratios across all subsectors.
• The trailing twelve-month average P/E ratio for the retail industry in January 2021 was 22.70.

Understanding the Price-to-Earnings (P/E) Ratio

The P/E ratio, often called the "multiple," reflects how much investors are willing to pay per dollar of earnings. For instance, a P/E of 12 means investors pay $12 for every $1 of earnings. High P/E ratios can signal expectations of future growth but may also indicate overvaluation, while low P/E ratios might suggest undervaluation or market skepticism.

It is important to note that P/E ratios should not be used in isolation but rather alongside other financial metrics to obtain a comprehensive view of a company's valuation.

Important Consideration

Since earnings calculations and reporting timelines vary across industries, comparing P/E ratios between different sectors may lead to misleading conclusions.

Average P/E Ratio Across Retail Subsectors

Data from New York University's Stern School of Business categorizes retail into seven subsectors, each with unique P/E characteristics. Notable large-cap companies such as Walmart (WMT), Costco (COST), Dollar Tree (DLTR), and The Home Depot (HD) are part of this diverse mix, alongside smaller over-the-counter stocks.

As of January 2021, the trailing twelve-month average P/E ratios for retail subsectors are:

• Building Supply Retailers: 140.11
• Online Retailers: 131.27
• Retail Distributors: 138.44
• Specialty Lines Retailers: 55.99
• General Retailers: 22.70
• Automotive Retailers: 17.52
• Grocery and Food Retailers: 14.41

These figures highlight significant variation in valuation expectations within the retail sector.

Calculating the Retail Sector’s Overall P/E Ratio

The retail sector's average P/E ratio is computed by summing the P/E ratios of all seven subsectors and dividing by seven. For example, summing the subsector P/E ratios yields 452.55; dividing this by seven results in an average P/E of 64.65 for the retail sector as of January 2021.

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