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Product cost inflation, tight labor market and supply-chain bottlenecks are some of the headwinds that players in the Zacks Retail – Discount Stores industry have been encountering of late. Also, the lack of stimulus checks this year could result in a drop in demand.
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 Corp., Target Corp., Dollar General Corp. and Dollar Tree, Inc..
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 Retail-Discount Stores Industry Trends
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, any deleverage in SG&A rate, higher labor and occupancy costs, and increased marketing and other store-related expenses might build pressure on margins. Meanwhile, the impact of additional employee payments and benefits along with investments undertaken to preserve the safety and health of customers and team members amid the coronavirus crisis cannot be ruled out. For now, the industry is dealing with supply-chain bottlenecks, rising freight charges and labor shortages.
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 unless derailed by elevated inflation and looming COVID-19 impacts. 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 and behavior, industry participants have been evolving to play dual in-store and online roles. Apart from upgrading digitally, companies are coming up with unique products and better deals. 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 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 #174, which places it in the bottom 31% 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 January 2022, the industry's earnings estimate has declined 0.3%.
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 outperformed the broader Retail – Wholesale sector and the Zacks S&P 500 composite over the past year.
Stocks in this industry have collectively advanced 18.3% compared with the Zacks S&P 500 Composite's increase of 12.8%. Meanwhile, the Zacks Retail – Wholesale sector has declined 15.2% in the said time frame.
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 23.66 compared with the S&P 500's 20.17 and the sector's 23.67.
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 22.67X.
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 13.3%, on average. It has an estimated long-term earnings growth rate of 8.9%. The Zacks Consensus Estimate for its current-fiscal earnings per share (EPS) has moved up 0.3% in the past 30 days. Notably, shares of this Zacks Rank #2 (Buy) company have surged 60.4% in the past year. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Target: This general merchandise retailer has been making investments to enhance omni-channel capabilities, develop new brands, refurbish stores and expand same-day delivery options to provide a seamless shopping experience to customers. Markedly, Target has been making multiple changes to its business model to adapt and stay relevant in the ever-evolving retail landscape. The company is always striving to build on its partnerships, especially with popular and high-profile brands.
Impressively, Target has a trailing four-quarter earnings surprise of 21.3%, on average. The company has an estimated long-term earnings growth rate of 16.5%. The Zacks Consensus Estimate for its current-fiscal EPS has risen 9.3% in the past 60 days. We also note that shares of this Zacks Rank #2 company have risen 5.1% in the past year.
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 also 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 9.8%, on average. It has an estimated long-term earnings growth rate of 11.5%. The Zacks Consensus Estimate for its current-fiscal EPS has jumped 2.9% in the past 30 days. Shares of this Zacks Rank #3 (Hold) company have advanced 11.5% in the past year.
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 11.8%, on average. It has an estimated long-term earnings growth rate of 15.5%. The Zacks Consensus Estimate for its current-fiscal EPS has moved up 1% in the past 30 days. We note that shares of this Zacks Rank #3 company have rallied 33% in the past year.
Why Haven't You Looked at Zacks' Top Stocks?
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Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights Costco Wholesale, Target, Dollar General, and Dollar Tree
For Immediate Release
Chicago, IL – April 7, 2022 – Today, Zacks Equity Research discusses Costco Wholesale Corp. (COST - Free Report) , Target Corp. (TGT - Free Report) , Dollar General Corp. (DG - Free Report) and Dollar Tree, Inc. (DLTR - Free Report)
Industry: Discount Retail
Link: https://www.zacks.com/commentary/1893901/4-retail-discount-stocks-worth-a-look-despite-industry-woes
Product cost inflation, tight labor market and supply-chain bottlenecks are some of the headwinds that players in the Zacks Retail – Discount Stores industry have been encountering of late. Also, the lack of stimulus checks this year could result in a drop in demand.
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 Corp., Target Corp., Dollar General Corp. and Dollar Tree, Inc..
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 Retail-Discount Stores Industry Trends
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, any deleverage in SG&A rate, higher labor and occupancy costs, and increased marketing and other store-related expenses might build pressure on margins. Meanwhile, the impact of additional employee payments and benefits along with investments undertaken to preserve the safety and health of customers and team members amid the coronavirus crisis cannot be ruled out. For now, the industry is dealing with supply-chain bottlenecks, rising freight charges and labor shortages.
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 unless derailed by elevated inflation and looming COVID-19 impacts. 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 and behavior, industry participants have been evolving to play dual in-store and online roles. Apart from upgrading digitally, companies are coming up with unique products and better deals. 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 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 #174, which places it in the bottom 31% 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 January 2022, the industry's earnings estimate has declined 0.3%.
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 outperformed the broader Retail – Wholesale sector and the Zacks S&P 500 composite over the past year.
Stocks in this industry have collectively advanced 18.3% compared with the Zacks S&P 500 Composite's increase of 12.8%. Meanwhile, the Zacks Retail – Wholesale sector has declined 15.2% in the said time frame.
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 23.66 compared with the S&P 500's 20.17 and the sector's 23.67.
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 22.67X.
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 13.3%, on average. It has an estimated long-term earnings growth rate of 8.9%. The Zacks Consensus Estimate for its current-fiscal earnings per share (EPS) has moved up 0.3% in the past 30 days. Notably, shares of this Zacks Rank #2 (Buy) company have surged 60.4% in the past year. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Target: This general merchandise retailer has been making investments to enhance omni-channel capabilities, develop new brands, refurbish stores and expand same-day delivery options to provide a seamless shopping experience to customers. Markedly, Target has been making multiple changes to its business model to adapt and stay relevant in the ever-evolving retail landscape. The company is always striving to build on its partnerships, especially with popular and high-profile brands.
Impressively, Target has a trailing four-quarter earnings surprise of 21.3%, on average. The company has an estimated long-term earnings growth rate of 16.5%. The Zacks Consensus Estimate for its current-fiscal EPS has risen 9.3% in the past 60 days. We also note that shares of this Zacks Rank #2 company have risen 5.1% in the past year.
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 also 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 9.8%, on average. It has an estimated long-term earnings growth rate of 11.5%. The Zacks Consensus Estimate for its current-fiscal EPS has jumped 2.9% in the past 30 days. Shares of this Zacks Rank #3 (Hold) company have advanced 11.5% in the past year.
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 11.8%, on average. It has an estimated long-term earnings growth rate of 15.5%. The Zacks Consensus Estimate for its current-fiscal EPS has moved up 1% in the past 30 days. We note that shares of this Zacks Rank #3 company have rallied 33% in the past year.
Why Haven't You Looked at Zacks' Top Stocks?
Our 5 best-performing strategies have blown away the S&P's impressive +28.8% gain in 2021. Amazingly, they soared +40.3%, +48.2%, +67.6%, +94.4%, and +95.3%. Today you can access their live picks without cost or obligation.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.