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4 Discount Retail Stocks Poised for Blockbuster Q1 Earnings

Zacks Equity Research

The first-quarter 2019 earnings season is almost coming to an end, with only a large chunk of retailers left to present their results. The reporting cycle has so far been robust from the earnings and sales beat perspective. However, results of companies have deteriorated from the prior-year period.

Here, we would focus on the Retail - Discount Stores industry that comprises companies offering apparel, accessories, footwear, beauty products, personal and baby care products, cleaning products, pet supplies, and food and beverage products.

The industry’s prospects are closely tied to the purchasing power of consumers. The unique off-price model of discount stores makes it an attractive destination for customers in all economic scenarios. The industry gains strength mainly from the efforts of constituent players to grab a bigger share on attributes such as price, products and speed to market. Further, these companies are steadily strengthening their digital ecosystem and omni-channel capabilities while boosting shipping and delivery capabilities in the face of fierce competition from Amazon AMZN. These efforts have been driving the top and bottom line numbers of the industry players for quite some time now and the to-be-reported quarter is not expected to be an exception.

However, players in this space continue to grapple with increased domestic freight, shrink, as well as distribution and occupancy expenses, in addition to increased markdowns. This has been weighing on margins of these companies, much like others in the broader Retail-Wholesale sector. Furthermore, higher costs incurred for initiatives related to store expansion, digital growth and improving store productivity might be deterrents to operating margin growth in the upcoming quarterly release. Not only this, a potential increase in trade tariffs due to the U.S.-China trade war might affect near-term results of some companies in this industry.

Despite these odds, the stocks in the Retail - Discount Stores industry have shown resilience in the past year. The industry has surged 21% in this period compared with the broader sector’s rally of 6.2% and the S&P 500 index’s growth of 5.3%. Further, the industry is placed among the top 40% out of the more than 250 Zacks industries.

Industry Perfromance

In a nutshell, notable progress on these productivity enhancement initiatives by players makes this industry attractive for this earnings season.

Q1 Expectations

The Retail – Discount Stores industry, which is part of the Zacks Retail-Wholesale sector, seems poised for growth in the first quarter of 2019. According to the latest Earnings Trends, the Retail-Wholesale sector’s aggregate first-quarter EPS is expected to increase 9.7%, with revenues anticipated to witness 7.5% growth.

On that note, we bring to you four stocks from the Zacks Retail – Discount Stores industry that may show promise based on their favorable Zacks Rank and a positive Earnings ESP. Our research shows that stocks, with a combination of a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP, have as high as 70% chance of delivering a positive earnings surprise. It makes sense to add these potential winners to your portfolio, ahead of their releases. You may uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Our Picks

Target Corporation TGT operates as a general merchandise retailer in the U.S. The company provides an array of goods, ranging from household essentials and electronics to toys, and apparel for men, women and kids. It also houses food and pet supplies, home furnishings and décor, home improvement, automotive products, and seasonal merchandise. The Zacks Consensus Estimate for the company’s first-quarter fiscal 2019 earnings is pegged at $1.42 per share, suggesting growth of 7.6% from the year-ago reported quarter. This Minneapolis, MN-based company is likely to report earnings on May 22. The company has an Earnings ESP of +0.42% and a Zacks Rank #2 at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Dollar Tree Inc. DLTR, which is an operator of discount variety stores offering merchandise at a fixed price point of $1.00, is a solid bet. The company offers a wide range of quality everyday general merchandise in many categories, including housewares, seasonal goods, candy and food, toys, health and beauty care, gifts, party goods, stationery, books, personal accessories, and other consumer items. It currently has a Zacks Rank #2 and an Earnings ESP of +0.51%. It delivered positive earnings surprise in the last two quarters. The Zacks Consensus Estimate for the company’s earnings in first-quarter fiscal 2019 is pegged at $1.12 per share.

Big Lots Inc. BIG is a broad-line closeout retailer in the United States. The company offers products under various merchandising categories, which include Food, Consumables, Furniture, Seasonal, Soft Home, Hard Home, and Electronics & Accessories. Currently, it has an Earnings ESP of +0.71% and a Zacks Rank #3. The Zacks Consensus Estimate for the company’s first-quarter fiscal 2019 earnings is pegged at 70 cents per share, which remained unchanged in the last 30 days. This Columbus, OH-based company delivered a positive earnings surprise of 16.5% in the last reported quarter.

Dollar General Corporation DG is one of the largest discount retailers in the United States. The company trades in low-priced merchandise, typically $10 or less. It currently carries a Zacks Rank #3 and an Earnings ESP of +1.51%. The Zacks Consensus Estimate for the company’s first-quarter fiscal 2019 earnings is pegged at $1.39 per share, indicating growth of 2.2% from the year-ago reported figure. Estimates for the quarter remained unchanged in the last 30 days. This Goodlettsville, TN-based company has a long-term earnings growth rate of 12.5%.

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