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4 Retail Discount Stocks to Seize Opportunities Despite Industry Woes
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The Retail – Discount Stores industry is transforming due to a combination of economic pressures and changing consumer behaviors. Inflation and higher interest rates have created a challenging environment, impacting consumer spending patterns and confidence. While discount retailers are often seen as beneficiaries during economic strain, they now face the need to swiftly adapt to maintain their competitive edge.
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 investments to accelerate digitization have been working in favor of companies like Costco Wholesale Corporation (COST - Free Report) , The TJX Companies, Inc. (TJX - Free Report) , Target Corporation (TGT - Free Report) and Burlington Stores, Inc. (BURL - Free Report) .
About the Industry
The Retail – Discount Stores industry is a significant segment within the retail sector that caters to price-conscious consumers seeking value-for-money products. These stores specialize in offering a wide range of merchandise, including groceries, household items, apparel, electronics, cleaning products, pet supplies and more, at discounted prices compared to traditional retail outlets. Discount stores operate on a low-cost business model, focusing on cost-efficient operations, bulk purchasing and streamlined supply chains to offer competitive pricing. These stores often carry both national and private-label brands, providing a mix of products to cater to a diverse customer base. The Retail – Discount Stores industry has shown resilience, even during economic downturns, as consumers tend to prioritize value-oriented shopping.
4 Key Industry Trends to Watch
Soft Demand May Hit Revenues: Elevated interest rates, underlying inflationary pressure and geopolitical concerns continue to pose a threat to consumer spending activity. The industry's outlook heavily relies on consumer purchasing power, which has been strained by higher prices, putting pressure on family budgets and dampening demand. While inflation has shown signs of easing, it remains above the Federal Reserve's long-term target of 2%. Much will depend on the outcome of the Fed’s upcoming meeting and the extent to which any rate cuts might stimulate consumer spending activity.
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. The increasing dominance of e-commerce players has made the retail discount space highly competitive. This has compelled many 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. However, companies have been focusing on undertaking initiatives to mitigate cost-related challenges. These include streamlining operational structures, optimizing supply networks and adopting effective pricing policies.
Consumers Seek Better Bargains: Consumers are increasingly seeking better bargains, prompting industry players to focus on offering discounted prices to attract low- to middle-income groups looking for value and convenience amid rising prices. To meet this demand, retailers are innovating with compelling products and enhancing their digital and data analytics capabilities, aiming to capture the attention of price-sensitive shoppers.
Digitization is the Key to Growth: With the change in consumer shopping patterns, industry participants have been evolving to play dual in-store and online roles. Companies are increasingly directing resources toward digital platforms, accelerating fleet optimization and enhancing their supply chains. Initiatives to expand delivery options, such as curbside pickup and ship-to-home orders, along with contactless payment solutions, have proven beneficial. Retailers are also investing in store renovations, improved checkouts and mobile point-of-sale capabilities to keep physical stores relevant. By focusing on consumers' product preferences and their inclination toward online shopping, retailers are replenishing shelves with in-demand merchandise and ramping up investments in digitization to drive growth.
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 #194, which places it in the bottom 23% 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 outperform 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. Since the beginning of December 2023, the industry’s earnings estimate has declined by 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 41.9%. Meanwhile, the Zacks Retail – Wholesale sector has risen 24.2%, and the S&P 500 has rallied 25.7% in the said time frame.
One-Year Price Performance
Industry's Current Valuation
Based on a forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing retail stocks, the industry is currently trading at 30.63 compared with the S&P 500’s 21.45 and the sector’s 23.35.
Over the last five years, the industry has traded as high as 30.63X and as low as 21.09X, with the median being 24.83X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
4 Retail Discount Store Stocks to Keep a Close Eye On
Burlington Stores: Burlington Stores has demonstrated a strong ability to adapt to consumer trends, which gives it a competitive edge in the retail landscape. By staying in tune with customer preferences and adjusting its product offerings, the company is well-positioned to capture additional market share. Burlington has skillfully balanced promotions with regular price sales, appealing to budget-conscious shoppers while protecting margins. Its strategic initiatives, including enhancing merchandising capabilities and optimizing store operations, have supported revenue growth. With targeted store openings, relocations and real-time inventory management, Burlington has seized opportunities and improved store productivity.
The Zacks Consensus Estimate for Burlington Stores’ current financial-year revenues and EPS suggests growth of 10% and 30.5%, respectively, from the year-ago reported figure. Burlington Stores has a trailing four-quarter earnings surprise of 18.4%, on average. Shares of this Zacks Rank #2 (Buy) company have rallied 98.7% in the past year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: BURL
Costco: The discount retailer’s growth strategies, better price management and decent membership trends have been contributing to its performance. These factors have been aiding this Issaquah, WA-based company in registering decent sales numbers. The company's distinctive membership business model and pricing power set it apart from traditional players. We believe a favorable product mix, steady store traffic, pricing strength and strong liquidity should benefit Costco.
Costco has a trailing four-quarter earnings surprise of 2.3%, on average. The Zacks Consensus Estimate for current financial-year revenues and EPS suggests growth of 5.1% and 10.4%, respectively, from the year-ago reported figure. Shares of this Zacks Rank #3 (Hold) company have surged 63.3% in the past year.
Price and Consensus: COST
TJX Companies: TJX's business model thrives on flexibility, allowing it to swiftly adapt to shifting market trends and seize new opportunities. This agility sets TJX apart in the off-price retail space, where the ability to source and offer premium brands at discounted prices is crucial. By maintaining a nimble approach to inventory management, TJX can quickly respond to changes in consumer preferences, ensuring fresh and appealing merchandise across its stores. The company's strong relationships with vendors also enable it to secure high-quality products at a lower cost, which it passes on to value-driven shoppers. This operational efficiency not only keeps customer traffic high but also supports sustained financial growth.
TJX Companies has a trailing four-quarter earnings surprise of 4.4%, on average. The Zacks Consensus Estimate for current financial-year revenues and EPS suggests growth of 3.6% and 10.4%, respectively, from the year-ago reported figure. Shares of this Zacks Rank #3 company have risen 30.5% in the past year.
Price and Consensus: TJX
Target: Minneapolis, MN-based Target has been actively evolving its business model to remain competitive in the ever-changing retail landscape. The company has been focused on enhancing its omnichannel capabilities, launching new brands, renovating stores and expanding same-day delivery options to provide a seamless shopping experience. Target's commitment to integrating advanced technologies like AI and machine learning is set to improve customer engagement and operational efficiency across its platform. These have been contributing to the top line.
The Zacks Consensus Estimate for Target’s current financial-year EPS suggests growth of 6.6% from the year-ago reported figure. TGT has a trailing four-quarter earnings surprise of 20.3%, on average. We note that shares of this Zacks Rank #3 company have advanced 28.3% in the past year.
Price and Consensus: TGT
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4 Retail Discount Stocks to Seize Opportunities Despite Industry Woes
The Retail – Discount Stores industry is transforming due to a combination of economic pressures and changing consumer behaviors. Inflation and higher interest rates have created a challenging environment, impacting consumer spending patterns and confidence. While discount retailers are often seen as beneficiaries during economic strain, they now face the need to swiftly adapt to maintain their competitive edge.
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 investments to accelerate digitization have been working in favor of companies like Costco Wholesale Corporation (COST - Free Report) , The TJX Companies, Inc. (TJX - Free Report) , Target Corporation (TGT - Free Report) and Burlington Stores, Inc. (BURL - Free Report) .
About the Industry
The Retail – Discount Stores industry is a significant segment within the retail sector that caters to price-conscious consumers seeking value-for-money products. These stores specialize in offering a wide range of merchandise, including groceries, household items, apparel, electronics, cleaning products, pet supplies and more, at discounted prices compared to traditional retail outlets. Discount stores operate on a low-cost business model, focusing on cost-efficient operations, bulk purchasing and streamlined supply chains to offer competitive pricing. These stores often carry both national and private-label brands, providing a mix of products to cater to a diverse customer base. The Retail – Discount Stores industry has shown resilience, even during economic downturns, as consumers tend to prioritize value-oriented shopping.
4 Key Industry Trends to Watch
Soft Demand May Hit Revenues: Elevated interest rates, underlying inflationary pressure and geopolitical concerns continue to pose a threat to consumer spending activity. The industry's outlook heavily relies on consumer purchasing power, which has been strained by higher prices, putting pressure on family budgets and dampening demand. While inflation has shown signs of easing, it remains above the Federal Reserve's long-term target of 2%. Much will depend on the outcome of the Fed’s upcoming meeting and the extent to which any rate cuts might stimulate consumer spending activity.
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. The increasing dominance of e-commerce players has made the retail discount space highly competitive. This has compelled many 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. However, companies have been focusing on undertaking initiatives to mitigate cost-related challenges. These include streamlining operational structures, optimizing supply networks and adopting effective pricing policies.
Consumers Seek Better Bargains: Consumers are increasingly seeking better bargains, prompting industry players to focus on offering discounted prices to attract low- to middle-income groups looking for value and convenience amid rising prices. To meet this demand, retailers are innovating with compelling products and enhancing their digital and data analytics capabilities, aiming to capture the attention of price-sensitive shoppers.
Digitization is the Key to Growth: With the change in consumer shopping patterns, industry participants have been evolving to play dual in-store and online roles. Companies are increasingly directing resources toward digital platforms, accelerating fleet optimization and enhancing their supply chains. Initiatives to expand delivery options, such as curbside pickup and ship-to-home orders, along with contactless payment solutions, have proven beneficial. Retailers are also investing in store renovations, improved checkouts and mobile point-of-sale capabilities to keep physical stores relevant. By focusing on consumers' product preferences and their inclination toward online shopping, retailers are replenishing shelves with in-demand merchandise and ramping up investments in digitization to drive growth.
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 #194, which places it in the bottom 23% 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 outperform 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. Since the beginning of December 2023, the industry’s earnings estimate has declined by 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 41.9%. Meanwhile, the Zacks Retail – Wholesale sector has risen 24.2%, and the S&P 500 has rallied 25.7% in the said time frame.
One-Year Price Performance
Industry's Current Valuation
Based on a forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing retail stocks, the industry is currently trading at 30.63 compared with the S&P 500’s 21.45 and the sector’s 23.35.
Over the last five years, the industry has traded as high as 30.63X and as low as 21.09X, with the median being 24.83X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
4 Retail Discount Store Stocks to Keep a Close Eye On
Burlington Stores: Burlington Stores has demonstrated a strong ability to adapt to consumer trends, which gives it a competitive edge in the retail landscape. By staying in tune with customer preferences and adjusting its product offerings, the company is well-positioned to capture additional market share. Burlington has skillfully balanced promotions with regular price sales, appealing to budget-conscious shoppers while protecting margins. Its strategic initiatives, including enhancing merchandising capabilities and optimizing store operations, have supported revenue growth. With targeted store openings, relocations and real-time inventory management, Burlington has seized opportunities and improved store productivity.
The Zacks Consensus Estimate for Burlington Stores’ current financial-year revenues and EPS suggests growth of 10% and 30.5%, respectively, from the year-ago reported figure. Burlington Stores has a trailing four-quarter earnings surprise of 18.4%, on average. Shares of this Zacks Rank #2 (Buy) company have rallied 98.7% in the past year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: BURL
Costco: The discount retailer’s growth strategies, better price management and decent membership trends have been contributing to its performance. These factors have been aiding this Issaquah, WA-based company in registering decent sales numbers. The company's distinctive membership business model and pricing power set it apart from traditional players. We believe a favorable product mix, steady store traffic, pricing strength and strong liquidity should benefit Costco.
Costco has a trailing four-quarter earnings surprise of 2.3%, on average. The Zacks Consensus Estimate for current financial-year revenues and EPS suggests growth of 5.1% and 10.4%, respectively, from the year-ago reported figure. Shares of this Zacks Rank #3 (Hold) company have surged 63.3% in the past year.
Price and Consensus: COST
TJX Companies: TJX's business model thrives on flexibility, allowing it to swiftly adapt to shifting market trends and seize new opportunities. This agility sets TJX apart in the off-price retail space, where the ability to source and offer premium brands at discounted prices is crucial. By maintaining a nimble approach to inventory management, TJX can quickly respond to changes in consumer preferences, ensuring fresh and appealing merchandise across its stores. The company's strong relationships with vendors also enable it to secure high-quality products at a lower cost, which it passes on to value-driven shoppers. This operational efficiency not only keeps customer traffic high but also supports sustained financial growth.
TJX Companies has a trailing four-quarter earnings surprise of 4.4%, on average. The Zacks Consensus Estimate for current financial-year revenues and EPS suggests growth of 3.6% and 10.4%, respectively, from the year-ago reported figure. Shares of this Zacks Rank #3 company have risen 30.5% in the past year.
Price and Consensus: TJX
Target: Minneapolis, MN-based Target has been actively evolving its business model to remain competitive in the ever-changing retail landscape. The company has been focused on enhancing its omnichannel capabilities, launching new brands, renovating stores and expanding same-day delivery options to provide a seamless shopping experience. Target's commitment to integrating advanced technologies like AI and machine learning is set to improve customer engagement and operational efficiency across its platform. These have been contributing to the top line.
The Zacks Consensus Estimate for Target’s current financial-year EPS suggests growth of 6.6% from the year-ago reported figure. TGT has a trailing four-quarter earnings surprise of 20.3%, on average. We note that shares of this Zacks Rank #3 company have advanced 28.3% in the past year.
Price and Consensus: TGT