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There aren’t many stocks that are widely outperforming the market this year. With the exception of energy names, it’s been a rough go for equities in 2022 – particularly for growth and technology names. As costs have spiked for businesses, it’s become increasingly difficult given a 40-year high in inflation for even the leading discount retailers and other low-cost stores to maintain prices at a fixed level.
Tomorrow morning we’ll get a glimpse into April’s inflation reading when the U.S. Bureau of Labor Statistics releases the CPI data. The median forecast calls for an 8.1% increase in consumer prices year-over-year, a slight slowdown from March’s 8.5% figure. Lower-than-expected numbers may signal an easing of supply chain issues which could lead to cooler consumer prices, while hotter inflation prints may exaggerate the move even further.
Discount retailers primarily sell low-margin consumables such as food, household staples, and seasonal goods. It becomes more challenging for these companies to hold costs low when their own costs are skyrocketing. That’s why it’s very important – particularly in this type of market environment – to identify businesses that are able to pass on these increased costs to consumers without any negative effects.
One of the more defensive businesses, discount retailers are consumer staples that are fairly resilient. The leaders in this space exhibit high pricing power. They can pass on rising costs without losing much volume at all. These defensive companies tend to fare better during inflationary periods and market downturns.
Let’s take a deeper look at a leading discount retailer that is outpacing the market. This company is part of the Zacks Retail – Discount Stores industry, which ranks in the top 24% out of approximately 250 Zacks Ranked Industries. By targeting stocks within the top industry groups, we can dramatically improve our odds of success.
Dollar Tree, Inc. (DLTR)
Dollar Tree operates discount variety retail stores. The company is the largest single-price-point retailer in North America. DLTR provides consumable products such as food and personal care items, household paper and chemicals, health and beauty items, as well as clothing and other fashion accessories. Dollar Tree was founded in 1986 and is headquartered in Chesapeake, VA.
DLTR was the last major dollar store chain that kept prices at $1 or under before raising prices to $1.25 several months ago. The company acquired Family Dollar back in 2015 to expand its retail reach; it now operates over 16,000 stores in 48 states and five Canadian provinces.
DLTR has been on a hot streak in terms of earnings surprises, exceeding estimates in each of the past nine quarters. The retailer chain most recently posted Q4 EPS back in March of $2.01, a +12.29% surprise over the $1.79 consensus. DLTR has posted a trailing four-quarter average earnings surprise of +11.76%, helping shares advance 36.22% higher in the past year. The stock is up over 12% this year while most stocks have been in bear market territory.
Dollar Tree, Inc. Price, Consensus and EPS Surprise
Analysts covering DLTR have upped their Q1 EPS estimates by +2.56% in the past 60 days. The Zacks Consensus Estimate now stands at $2.00, translating to potential growth of 25% relative to the same quarter last year. Sales are expected to have risen 4.05% in first quarter to $6.74 billion.
Make sure to keep an eye on this leading discount retailer that is bucking the overall downtrend of the market.
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