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4 Retail Discount Stocks That Warrant Attention Despite Industry Woes

Ongoing inflation, tight labor market and supply chain issues are some of the headwinds that players in the Zacks Retail – Discount Stores industry have been encountering lately. Also, rising prices are squeezing consumers’ disposable income, depleting personal savings and dampening demand. With the desperate need to tame inflation, the Federal Reserve is raising the benchmark interest rate. But a higher interest rate environment is not good news for consumer-centric industries.

That said, 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, Target Corporation TGT and Burlington Stores, Inc. BURL.

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.

4 Key Industry Trends to Watch

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, a tight labor market and supply-chain issues. 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.

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Consumer Confidence Slackens: Escalating prices and rising interest rates continue to pose a threat to consumer spending activity and confidence. Per Conference Board data, the Consumer Confidence Index nudged down to 107.1 in January from December’s upwardly revised reading of 109.0. Undoubtedly, the industry’s prospects are correlated with the purchasing power of consumers. But rising prices have been discomforting family budgets. The consumer price index rose to 6.5% in December 2022 on a year-over-year basis, albeit at a slower rate when compared with November.

Consumers Seek Better Bargains: The strategy to sell products at discounted prices has helped industry players draw customers in the low-to-middle income groups who have been seeking both value and convenience amid rising prices. Industry participants have been focusing on creating innovative and compelling products as well as enhancing digital and data analytics capabilities. They are trying to tap any surge in demand unless derailed by elevated inflation. We also believe that failure to restock inventory at fair prices or delay getting the products delivered to consumers’ doorsteps could compound retailers’ woes.

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 the 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.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Retail – Discount Stores industry is housed within the broader Zacks Retail – Wholesale sector. The industry currently carries a Zacks Industry Rank #186, which places it in the bottom 26% 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 drab 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 positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate.

Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Since the beginning of November 2022, the industry’s earnings estimate has declined 8.7%.

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 risen 2.1% compared with the Zacks S&P 500 composite’s decline of 9.8%. Meanwhile, the Zacks Retail – Wholesale sector has declined 14.9% 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 25.26 compared with the S&P 500’s 18.74 and the sector’s 22.73.

Over the last five years, the industry has traded as high as 29.98X and as low as 18.04X, with the median being at 23.20X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

4 Retail Discount Stores Stocks to Keep a Close Eye On

Burlington Stores: Burlington Stores is poised well for growth, thanks to the successful execution of the Burlington 2.0 strategy and strong prospects. The strategy is focused on three aspects, marketing, merchandising and store prototype. Burlington Stores’ off-price model is helping customers to get nationally branded, fashionable and high-quality products at the right price.

The Zacks Consensus Estimate for Burlington Stores’ fiscal 2023 sales and earnings per share (EPS) suggests growth of 11.8% and 60.8%, respectively, from the year-ago reported figure. Notably, shares of this Zacks Rank #2 (Buy) company have risen 42.5% in the past six months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: BURL

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 3.7%, on average. It has an estimated long-term earnings growth rate of 9.6%. The Zacks Consensus Estimate for current financial-year revenues and EPS suggests growth of 7.2% and 8.5%, respectively, from the year-ago reported figure. Shares of this Zacks Rank #3 (Hold) company have declined 4.8% in the past six months.

Price and Consensus: COST

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.

Impressively, The TJX Companies has a trailing four-quarter earnings surprise of 2.6%, on average. It has an estimated long-term earnings growth rate of 10.5%.  The Zacks Consensus Estimate for current financial-year revenues and EPS suggests growth of 1.9% and 9.5%, respectively, from the year-ago reported figure. We note that shares of this Zacks Rank #3 company have surged 25.9% in the past six months.

 

Price and Consensus: TJX

Target: This Minneapolis, MN-based company has been making multiple changes to its business model to adapt and stay relevant in the dynamic retail landscape. Target has been deploying resources to enhance omni-channel capabilities, come up with new brands, refurbish stores and expand same-day delivery options to provide customers seamless shopping experience. These have been contributing to the top line.

Impressively, Target has an estimated long-term earnings growth rate of 9.9%. The Zacks Consensus Estimate for current financial-year revenues suggests growth of 2.3% from the year-ago reported figure. We note that shares of this Zacks Rank #3 company have risen 4.2% in the past six months.

Price and Consensus: TGT

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Costco Wholesale Corporation (COST) : Free Stock Analysis Report

Target Corporation (TGT) : Free Stock Analysis Report

The TJX Companies, Inc. (TJX) : Free Stock Analysis Report

Burlington Stores, Inc. (BURL) : Free Stock Analysis Report

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