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4 Retail-Discount Stores Worth a Look Amid the COVID-19 Crisis

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The coronavirus pandemic has created a tough environment for the Zacks Retail – Discount Stores industry. Rising number of infected cases, concerns related to job and income, and fading hopes for a new stimulus package have shattered consumer confidence. Clearly, these factors raise apprehensions about the near-term prospects of the industry.

To beat the COVID-19 blues, industry participants have been focusing on deepening engagements with consumers, adding more compelling products, and enhancing digital and data analytics capabilities. Markedly, discount stores dealing in essentials and other household needs have emerged as favorite shopping destinations for customers amid the pandemic. Costco Wholesale Corporation (COST - Free Report) , Target Corporation (TGT - Free Report) , Dollar General Corporation (DG - Free Report) and Big Lots, Inc. (BIG - Free Report) are set to cash in on the opportunities.

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

4 Key Retail-Discount Stores Industry Trends

Coronavirus Dispirits Consumers: Rising number of coronavirus cases, sluggishness in labor market and absence of another fiscal stimulus, at least for now, have hurt consumer confidence. Per Conference Board data, the Consumer Confidence Index fell to 100.9 in October from a reading of 101.3 in September. Lynn Franco, senior director of economic indicators at the Conference Board, said, “There is little to suggest that consumers foresee the economy gaining momentum in the final months of 2020, especially with COVID-19 cases on the rise and unemployment still high.” Undeniably, drop in consumer sentiments has a direct bearing on consumers’ spending activity, and in turn, demand. Well, if consumers choose to tighten purse strings, retailers have to tough it out this holiday season. They also need to overcome any operational challenges and ramp up their buying and distribution capabilities. It goes without saying that any measure undertaken to stimulate demand or an availability of COVID-19 vaccine may lift consumer sentiments, and in turn retailing activities.

Consumers Seek Better Bargains: The strategy to sell products at discounted prices has helped industry players draw customers, who have been seeking both value and convenience amid the pandemic. Under the current circumstances, people in the low-to-middle income groups have been showing preference for discount stores for essentials and other household needs. Clearly, a differentiated product range resonates well with customers’ spending habits. It is also true that some of the industry participants such as Burlington Stores, Inc. (BURL - Free Report) , Ross Stores, Inc. (ROST - Free Report) and The TJX Companies, Inc. (TJX - Free Report) have been witnessing soft sales due to the ongoing crisis that has brought a paradigm shift in consumer buying behavior. People are preferring to purchase essentials before splurging on discretionary items, thus benefitting players like Dollar Tree, Inc. (DLTR - Free Report) . Incidentally, consumers are reducing shopping trips and going for larger basket sizes to maintain social distancing. Further, elevated stay at-home trends have provided a significant boost to online shopping.

Digitization in the New Normal: With the change in consumer shopping pattern and behavior amid the pandemic, industry participants have been evolving to play dual in-store and online roles. In fact, the companies’ digital businesses have played a key role amid the lockdown. Surely, these were not enough to make up for loss of revenues from brick-and-mortar stores. Nonetheless, 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 curbside pickup or delivery at home, are worth mentioning. Simultaneously, companies are investing in renovation, improved checkouts and mobile point-of-sale capabilities to keep stores relevant. Markedly, the COVID-19 outbreak has rapidly changed the convenience of digitization into a necessity, and companies have been taking every step to capitalize on that demand. Keeping in mind consumers’ product preferences and growing inclination toward online shopping, retailers need to replenish shelves with in-demand merchandise and ramp up investments in digitization this holiday season.

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 safety and health of customers and team members amid the coronavirus crisis cannot be ruled out. Nonetheless, companies have been focusing on cost containment, inventory optimization and prudent capital expenditures.

Zacks Industry Rank Indicates Dim Prospects

The Zacks Retail – Discount Stores industry is housed within the broader Zacks Retail – Wholesale sector. The industry currently carries a Zacks Industry Rank #212, which places it in the bottom 15% 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 gloomy 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 bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since the beginning of the year, the industry’s earnings estimate for the current year has moved down approximately 24.6%.

Despite the industry’s drab near-term prospects, we will present a few stocks that are worth taking a note of. But before that, it’s better to take a look at the industry’s shareholder returns and current valuation first.

Industry vs. Broader Market

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

Stocks in this industry have collectively advanced 13.7% compared with the Zacks S&P 500 Composite’s increase of 10.2% and the Zacks Retail – Wholesale sector’s rise of 35.1% 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 26.25 compared with the S&P 500’s 21.41 and the sector’s 30.67.

Over the last five years, the industry has traded as high as 29.98X and as low as 17.93X, with median being at 20.18X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

4 Retail Discount Stores Stocks to Keep a Close Eye On

Target Corporation: This general merchandise retailer has been making investments to enhance omni-channel capacities, come up with new brands, and remodel or refurbish stores to cater to consumer demand and behavior in the new normal. The company has been consolidating its position in the food and beverage space with a robust portfolio of owned and exclusive brands. The company’s commitment to offer unique shopping experience with safe and convenient options, including contactless Drive Up and Order Pickup, and same-day delivery with Shipt, are worth a mention. Impressively, Target has a trailing four-quarter earnings surprise of 37.6%, on average. Also, the Zacks Consensus Estimate for its current-fiscal EPS has moved up by 3 cents in the past 30 days. The company has an estimated long-term earnings growth rate of 7.2%. We also note that shares of this Zacks Rank #2 (Buy) company have surged 37.9% in the past six months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: TGT

Dollar General Corporation: Better pricing, private label offerings, effective inventory management and merchandise initiatives have been aiding this Goodlettsville, TN-based company’s performance. These along with focus on consumable and non-consumable categories with impressive same-store sales run are noteworthy. Also, in the wake of the coronavirus outbreak, the company has been witnessing healthy demand. Impressively, shares of this Zacks Rank #2 company have advanced 24.4% in the past six months. The stock may scale new highs with solid prospects, brand recognition and strategic endeavors such as the new store concept, popshelf, likely to act as propellants. Notably, the Zacks Consensus Estimate for its current-fiscal EPS has risen 1.6% in the past 30 days. Also, the company has a trailing four-quarter earnings surprise of 21.3%, on average. The company has an estimated long-term earnings growth rate of 11.1%.

Price and Consensus: DG

Big Lots, Inc.: This Columbus, OH-based company recently provided a business update for third-quarter fiscal 2020. Management cited that it has been witnessing robust sales, which is likely to help deliver a sturdy quarterly performance. Notably, the company’s growth strategies, including Operation North Star, and its strong assortment and early reads on Christmas are aiding customer acquisition. Management guided comparable sales growth in mid-teens for the third quarter. Based on impressive sales view, Big Lots projected third-quarter earnings in the bracket of 50-70 cents per share against a loss of 18 cents reported in the year-ago quarter. The company is leaving no stone unturned with respect to leveraging marketing strategies and expanding its e-commerce platform. Impressively, it is experiencing strong e-commerce growth, buoyed by the success of the Buy-Online, Pick-up-In-Store functionality. Notably, Big Lots also partnered with Instacart to expedite same-day delivery service. Further, the company is on track with its pantry-optimization initiative. Markedly, shares of this Zacks Rank #3 (Hold) company have more than doubled in the past six months. Also, the Zacks Consensus Estimate for its current-fiscal EPS has risen 13.5% in the past 60 days. Impressively, the company has a trailing four-quarter earnings surprise of 54.4%, on average. The company has an estimated long-term earnings growth rate of 4.5%.

Price and Consensus: BIG

Costco Wholesale Corporation: 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. Thanks to its status of an essential retailer, the company has been benefiting from rising demand. Cumulatively, these factors have been aiding this operator of membership warehouses in registering impressive comparable sales run. Costco registered comparable sales growth of 14.4% in October. The company has been rapidly adopting the omni-channel mantra to provide a seamless shopping experience, whether online or in stores. Consumers’ increased shift to online purchasing owing to the coronavirus outbreak seems to have worked in favor of Costco. We note that e-commerce comparable sales soared 91.1% during the month of October. Notably, shares of this Zacks Rank #3 company have rallied 22.4% in the past six months. Also, the Zacks Consensus Estimate for its current-fiscal EPS has increased by 6 cents in the past 30 days. Impressively, the company has a trailing four-quarter earnings surprise of 2.9%, on average. It has an estimated long-term earnings growth rate of 8.5%.

Price and Consensus: COST

These Stocks Are Poised to Soar Past the Pandemic

The COVID-19 outbreak has shifted consumer behavior dramatically, and a handful of high-tech companies have stepped up to keep America running. Right now, investors in these companies have a shot at serious profits. For example, Zoom jumped 108.5% in less than 4 months while most other stocks were sinking.

Our research shows that 5 cutting-edge stocks could skyrocket from the exponential increase in demand for “stay at home” technologies. This could be one of the biggest buying opportunities of this decade, especially for those who get in early.

See the 5 high-tech stocks now>>