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3 Discount Retail Stocks to Buy As Industry Evolves

Benjamin Rains
The retail industry has gone through an immense amount of change over the last few years, as many publicly traded brick-and-mortar stores now fight to stay in business through the online shopping revolution Amazon (AMZN) helped start.

The retail industry has gone through an immense amount of change over the last few years, as many publicly traded brick-and-mortar stores now fight to stay in business through the online shopping revolution Amazon AMZN helped start.

In 2017, more than 8,600 stores are expected to close their doors, according to Credit Suisse analysts. This number tops the number of brick-and-mortar locations that closed during the 2008 recession.

In these turbulent times for the retail industry, many investors have stayed away. But the potential for a GOP tax code overall, which would cut the corporate tax rate from 35% to 20%, could help the industry immensely.

A recent National Retail Federation post titled “Why Passing Tax Reform Is Good For Retail,” highlighted why a Republican tax bill could greatly benefit the retail industry. The post noted that both the Senate and House bills benefit retailers for three major reasons: “They address retail’s high, unequal tax burden; They enable reinvestment; They provide tax relief to consumers.”

Still, if the GOP bill isn’t passed, one retail sector—the discount segment—is already experiencing a boom in a more traditional brick-and-mortar manner. Discount retailers have capitalized on their core customers and started to expand their footprints.

With all of this said, let’s take a look at three discount retail stocks that investors might consider right now.

1.       Ross Stores, Inc. ROST

Shares of the discount retailer with the tagline “Dress for Less” jumped 31.62% in the last 12-weeks and rest near their 52-week high. Ross Stores is also currently a Zacks Rank #2 (Buy) and sports an overall “B” VGM grade.

In November, Ross reported Q3 net earnings of  $274 million, up from $245 million in the year-ago period. On top of that, the off-priced clothing retailer’s third-quarter sales climbed 8%.

For the current quarter, based on our Zacks Consensus Estimates, Ross’ revenues are projected to surge 12.56% to hit $3.95 billion. The company’s earnings are expected to climb 19.48%.

What’s more, within the last 60 days, Ross has received 11 positive full-year earnings estimate revisions against zero downgrades. The discount retail power has also beat or matched earnings estimates for 14 straight quarters.

2.       Dollar Tree, Inc DLTR

This retail chain is one of the only true “dollar stores,” where everything is sold for a dollar or less. Dollar Tree is currently a Zacks Rank #2 (Buy). With the integration of Family Dollar, Dollar Tree has opened more stores and focused on strategic initiatives, which led to the company raising its full-year expectations after posting solid Q3 earnings.

Shares of Dollar Tree have climbed nearly 38% in 2017, which almost quadruples the “Retail - Discount Stores” industry average and has helped push the company’s stock price to a new all-time high.

Dollar Tree is currently trading at 22.12x earnings, matching its industry’s average. The stock also sports a solid 1.17 P/S ratio. What’s more, our Zacks Consensus Estimates currently call for Dollar Tree’s Q4 earnings to climb 33.29% and its sales to pop 13.47%.

3.       Dollar General Corporation DG

Dollar General is currently a Zacks Rank #2 (Buy) and rocks an overall “A” VGM grade. This discount retailer is continuously expanding, and 2016 marked the 27th consecutive year of sales growth at established stores.

Shares of Dollar General have gained 22.55% this year, which tops the S&P 500 average by more than 5%. The discount giant is currently trading at 20.16x earnings, which marks a discount compared to its industry’s average.

Based on our current Zacks Consensus Estimates, Dollar General’s Q3 EPS are expected to hit $0.94, which would mark a 5.24% year-over-year jump. Along with this bottom line growth, Dollar General sales are projected to hit $5.80 billion, which would mark a 9.07% year-over-year improvement.

Dollar General is expected to post its third-quart results on Thursday, Dec. 7.

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