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4 Stocks to Watch as Bargain Hunters Turn to Discount Retailers

·7 min read

A strengthening labor market and strategic endeavors undertaken at company levels are working in tandem for the Zacks Retail – Discount Stores industry. Moreover, the strategy to sell products at discounted rates has helped industry players draw customers, who are currently feeling the pinch of rising prices.

Meanwhile, industry participants have been focusing on deepening engagements with consumers, adding more compelling products, and enhancing digital and data analytics capabilities. Inventory management, supply-chain enhancement, cost-structure realignment and investment to accelerate digitization have been working in favor of companies like Costco Wholesale Corporation COST, The TJX Companies, Inc. TJX, Dollar General Corporation DG, Dollar Tree, Inc. DLTR.

About the Industry

The Zacks Retail – Discount Stores industry comprises companies that offer apparel, accessories, footwear, beauty products, personal and baby care products, cleaning products, pet supplies, and food and beverage products at lower prices than traditional retail outlets. The industry participants also provide home textiles, home furnishings, housewares, arts and crafts supplies, toys, and seasonal décor products. These companies sell their products through stores, digital channels, or both. Some industry players operate membership shopping warehouse clubs, offering branded and private-label products in a range of merchandise categories. Most discount stores are gradually emerging as one-stop shopping destinations. The profitability of players depends on a prudent pricing model, a well-organized supply chain and an effective merchandising strategy.

3 Key Industry Trends to Watch

Consumers Seek Better Bargains Amid Inflation: The strategy to sell products at discounted prices has helped industry players draw customers who have been seeking both value and convenience amid rising prices. Under the current circumstances, people in the low-to-middle income groups have been showing a preference for discount stores to get quality products at reasonable prices. Industry participants have been focusing on deepening engagements with consumers, creating innovative and compelling products, and enhancing digital and data analytics capabilities. Clearly, companies are leaving no stone unturned to tap any surge in demand.

Digitization is Key to Growth: With the change in consumer shopping patterns, industry participants have been evolving to play dual in-store and online roles. Initiatives such as building omni-channel, coming up with loyalty and marketing programs, enhancing supply chain and providing faster delivery options, be it doorstep delivery, curbside pickup or buy online and pick up at store are worth mentioning. Simultaneously, companies are investing in the renovation, improved checkouts and mobile point-of-sale capabilities to keep stores relevant. Keeping in mind consumers’ product preferences and growing inclination toward online shopping, retailers have been replenishing shelves with in-demand merchandise and ramping up investments in digitization.

Pressure on Margins to Linger: Companies in the industry are vying for a bigger share on attributes such as price, products and speed to market. Further, the increasing dominance of e-commerce players has made the retail-discount space highly competitive. This has compelled a number of players to strengthen their digital ecosystem and boost shipping and delivery capabilities. While these endeavors drive sales, they entail high costs. Apart from these, higher marketing, advertising and other store-related expenses might compress margins. Of late, the industry participants have been dealing with product cost inflation, tight labor market and supply-chain headwinds. Nonetheless, companies have been focusing on undertaking initiatives to mitigate cost-related challenges. These include streamlining operational structures, optimizing supply networks as well as adopting effective pricing policies.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Retail – Discount Stores industry is housed within the broader Zacks Retail – Wholesale sector. The industry currently carries a Zacks Industry Rank #101, which places it in the top 40% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates encouraging near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry vs. Broader Market

The Zacks Retail – Discount Stores industry has outpaced the broader Retail – Wholesale sector and the Zacks S&P 500 composite over the past year.
    
Stocks in this industry have collectively fallen 4% compared with the Zacks S&P 500 Composite’s decline of 7.7%. Meanwhile, the Zacks Retail – Wholesale sector has declined 21.9% in the said time frame.

One-Year Price Performance

Industry's Current Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing retail stocks, the industry is currently trading at 24.10 compared with the S&P 500’s 17.97 and the sector’s 23.51.

Over the last five years, the industry has traded as high as 29.98X and as low as 17.93X, with the median being at 23.08X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

4 Retail Discount Stores Stocks to Keep a Close Eye On

Costco: This Issaquah, WA-based company’s growth strategies, better price management, decent membership trends and increasing penetration of e-commerce business have been contributing to its performance. Cumulatively, these factors have been aiding this operator of membership warehouses in registering an impressive comparable sales run. Costco has been rapidly adopting the omni-channel mantra to provide a seamless shopping experience, whether online or in stores.

Costco has a trailing four-quarter earnings surprise of 9.7%, on average. It has an estimated long-term earnings growth rate of 9.2%. The Zacks Consensus Estimate for its current-fiscal earnings per share (EPS) has moved up 0.2% in the past 30 days. Notably, shares of this Zacks Rank #2 (Buy) company have risen 22.3% in the past year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: COST

Dollar General: Better pricing, private label offerings, effective inventory management and merchandise initiatives have been aiding this Goodlettsville, TN-based company’s performance. These, along with a focus on consumable and non-consumable categories, are noteworthy. Dollar General has been offering “better-for-you” products at affordable prices. Additionally, it has been expanding cooler facilities to drive the sale of perishable items. The company’s initiatives such as DG Fresh, Fast Track and digitization should drive same-store sales.

Dollar General has a trailing four-quarter earnings surprise of 2.8%, on average. It has an estimated long-term earnings growth rate of 12.2%. The Zacks Consensus Estimate for its current-fiscal EPS has risen by a couple of cents in the past seven days. Shares of this Zacks Rank #2 company have advanced 7.2% in the past year.

Price and Consensus: DG

Dollar Tree: This Chesapeake, VA-based company’s strategic initiatives, including the expansion of $3 and $5 Plus assortment in Dollar Tree stores, as well as Combo Stores and H2 Renovations at Family Dollar, provide tremendous opportunities to drive sales and traffic.

Impressively, Dollar Tree has a trailing four-quarter earnings surprise of 13.1%, on average. It has an estimated long-term earnings growth rate of 15.5%. The Zacks Consensus Estimate for its current-fiscal EPS has been stable in the past 30 days. We note that shares of this Zacks Rank #2 company have rallied 64% in the past year.

Price and Consensus: DLTR

The TJX Companies: This Framingham, MA-based company’s flexible off-price business model, store expansion strategies, strong vendor relationship and availability of branded merchandise provide tremendous opportunities to drive sales and traffic. This was evident from The TJX Companies’ decent performance in first-quarter fiscal 2023, wherein both the top and the bottom line grew year over year.

Impressively, The TJX Companies has a trailing four-quarter earnings surprise of 10%, on average. It has an estimated long-term earnings growth rate of 10.5%. The Zacks Consensus Estimate for its current-fiscal EPS has moved up by a penny in the past seven days. We note that shares of this Zacks Rank #3 (Hold) company have fallen 10.8% in the past year.

Price and Consensus: TJX


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Costco Wholesale Corporation (COST) : Free Stock Analysis Report
 
The TJX Companies, Inc. (TJX) : Free Stock Analysis Report
 
Dollar General Corporation (DG) : Free Stock Analysis Report
 
Dollar Tree, Inc. (DLTR) : Free Stock Analysis Report
 
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