In an economic climate where the retail sector has constantly been dragged through the mud, many investors have opted to steer away from the sector. The SPDR S&P Retail ETF (XRT - Free Report) , which tracks the biggest names in retail, is coming off its worst month in more than a decade, declining roughly 13% in May. But even over a longer time frame, retail businesses have struggled to keep up with newly emerged innovative giants such as Amazon (AMZN - Free Report) . Over the past 5 years, shares of Amazon have soared past 460% while XRT has fallen by 2%.
The Consumer Confidence Effect
Historically speaking, consumer confidence rises as the stock market goes up. This correlation has been an indication as to why the retail sector has been sluggish as of late. Being in the midst of an ongoing trade war has not helped boost consumer confidence either. This lack of trust in the market has caused consumers to become more self-conscious and ultimately frugal with their expenses.
Despite all of the obstacles retail companies have been going through, a handful of companies have been able to see growth during these rough times. A key statistic that may be able to explain why some companies have seen growth rather than decline is that low-income consumer purchases grew by 6% this past April from a year ago. Low-income consumers (households earning less than $50,000) have surpassed both middle- and higher-income consumers spending growth. Consumer confidence has remined high as unemployment levels remain low, giving low income consumers the encouragement to spend a little more. Although these consumers aren’t spending at more expensive retail shops, they are spending at places with discounted products.
These trends are what prompted Bank of America to refer to the current climate as the “discount store decade” in a recent research report. Walmart (WMT - Free Report) is in the Retail-Supermarkets industry, which is in the top 16% on the Zacks Industry Rank (39 out of 247). The company’s EPS is expected to increase by 4.73% in 3-5years. Their price change relative to the S&P 500 index has been +4.87 over the past 12 weeks. Walmart is a company that can further appeal to the increase in spending coming from lower income consumers. Walmart sits at a Zacks Rank #2 (Buy).
Target (TGT - Free Report) is another retailer that’s proven its appeal to its consumers. Their brand awareness and marketing are what sets them apart from other retail companies, and their vast selection of products has always enticed consumers to spend more time in their stores. Target is in the Retail-Discount Stores industry, which falls in the top 12% on the Zacks Industry Rank (29 out of 247), and has a Zacks Style Score of B in Value thanks to its lower than industry average P/E ratio of 14.44. The stock also has an expected EPS growth rate of +7.07% over the next 3-5 years. The company’s value and strong performance within its sector has proven it to be a stock to consider adding to a portfolio. Target is a Zacks Rank #2 (Buy).
Dollar General (DG - Free Report) is a discount retail store that has always attracted consumers who are looking to cut back on spending. Their company motto of “Save Time, Save Money. Everyday!” could stand out to lower-income consumers willing to spend more of their aggregate income. Dollar General has a Zacks Style Score of B for Growth, as earnings are expected to increase nearly 8% for the current fiscal year. Furthermore, DG expects EPS to grow by almost 11% over the next 3-5 years.
Dollar General hit a 52-week high today, showcasing the upside the stock truly possesses. The stock’s YTD price change of more than 20% has outperformed the S&P 500’s gain of roughly 13% so far this year, another factor that should make investors take another look at this retailer. Dollar General is a Zacks Rank #2 (Buy).
Below the graph displays the companies Performance for the past two years relative to their respective market; Dollar General (orange), Target (green), Walmart (blue), and the market (red).
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