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Omni-Channel Approach Key to Retail-Discount Stores' Growth

Sumit Singh

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. The companies also provide home textiles, home furnishings, housewares, toys and seasonal décor products. They sell their products either through stores or digital channels or both. Some of the companies operate membership shopping warehouse clubs offering branded and private-label products in a range of merchandise categories.

Let’s take a look at the industry’s three major themes:

  • The industry’s prospects are correlated with the purchasing power of consumers. A sturdy job market, robust consumer confidence and higher disposable income work in favor of industry participants. Also, the strategy to sell products at discounted prices has helped industry players expand their customer base, which comprises the lower to middle income group. Moreover, a differentiated product range in sync with customers’ spending habits enables the companies to enrich the shopping experience, resulting in market share gains and higher sales per square foot.
     
  • Players in the industry are steadily developing omni-channel capabilities, which include technological updates and store remodels. They are undertaking brand enhancement efforts with off-price models and innovative customer-friendly approach such as same-day delivery options. These along with a compelling store growth story at convenient locations and focus on demand-driven products lend support. Better pricing, effective inventory management, and merchandise and operational initiatives should boost revenues of the industry constituents.
     
  • The companies in the industry are vying for a bigger share on attributes such as price, products and speed to market. Also, the increasing dominance of Amazon (AMZN) 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, any deleverage in SG&A rate, higher labor and occupancy costs, and increased marketing and other store-related expenses might also compress margins. Nonetheless, companies are resorting to cost containment. Again, 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.

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 #41, which places it in the top 16% 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 bright 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.

The industry’s position in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually becoming hopeful of this group’s earnings growth. Since the beginning of March, the industry’s earnings estimate for the current year has increased approximately 1.3%.

We will present a few stocks that have the potential to outperform the market based on a strong earnings outlook. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry vs. Broader Market

The Zacks Retail – Discount Stores industry has outperformed both the broader Retail – Wholesale Sector and the Zacks S&P 500 composite over the past year.

The stocks in this industry have collectively gained 18.4% compared with the Zacks S&P 500 Composite’s increase of 2.4%. The Zacks Retail – Wholesale sector has declined 3.2% 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 21.07 compared with the S&P 500’s 16.61 and the sector’s 23.04.

Over the last five years, the industry has traded as high as 21.68X, as low as 17.17X and at the median of 19.64X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)



Bottom Line

Discount retailers have succeeded in creating a niche despite the rising popularity of online retailers that has compelled many traditional operators to exit. This has been largely supported by investments, focus on cost savings and introduction of loyalty and marketing programs. However, costs associated with promotional activities and an aggressive pricing strategy on account of stiff competition remain deterrents.

That said, we are presenting four stocks from the Retail – Discount Stores industry, which carry a Zacks Rank #2 (Buy) and are well positioned to capitalize on the opportunities. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Dollar General Corporation (DG): For this discount retailer, the Zacks Consensus Estimate for current fiscal year EPS has increased by a couple of cents over the past 30 days. Moreover, the company’s bottom line has outperformed the consensus estimate by average of 1.6% in the trailing four quarters. The stock, which has increased roughly 39% over the past year, has an estimated long-term earnings growth rate of 10.9%.

Price and Consensus: DG

    
PriceSmart, Inc. (PSMT): For this operator of U.S. style membership shopping warehouse clubs, the consensus estimate for the current fiscal year has been stable over the past 30 days. Moreover, the company’s bottom line has outperformed the Zacks Consensus Estimate by average of 20.7% in the trailing four quarters.

Price and Consensus: PSMT




Target Corporation (TGT): Shares of this general merchandise retailer have gained approximately 30% in the past six months. The Zacks Consensus Estimate for the company’s current fiscal EPS has risen 1.9% in the past 30 days. The company has an estimated long-term earnings growth rate of 7.1%. The company delivered average positive earnings surprise of 2.6% in the trailing four quarters.

Price and Consensus: TGT

 

The TJX Companies, Inc. (TJX): Shares of this off-price apparel and home fashions retailer have increased about 13.5% in the past six months. The Zacks Consensus Estimate for the company’s current fiscal EPS has increased by a penny in the past 30 days. The company has an estimated long-term earnings growth rate of 10.9%. The company delivered average positive earnings surprise of 1.9% in the trailing four quarters.

Price and Consensus: TJX



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