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Consumer spending activity, which is one of the pivotal factors driving the economy, has somewhat slowed down. This is because inflation and recession-wary shoppers have curtailed spending. Underlying price pressure, a slowing labor market and a higher interest rate environment have cooled demand. Of late, players in the Zacks Retail – Discount Stores industry have been encountering these headwinds.
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 investments to accelerate digitization have been working in favor of companies like Costco Wholesale Corp., The TJX Companies, Inc., Target Corp. and Dollar General Corporation.
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, art and craft supplies, toys and seasonal decor 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
Soft Demand May Hit Revenues: Elevating prices and geopolitical concerns continue to pose a threat to consumer spending activity. Undoubtedly, the industry’s prospects are correlated with the purchasing power of consumers. However, rising prices have been discomforting family budgets. The Fed’s aggressive rate hikes to tame inflation also made things tough for consumers by squeezing disposable income.
Consequently, the demand has softened. Also, concerns related to a slowing economy and a possible recession have hit consumers’ sentiments that slid to a nine-month low in April. Per Conference Board data, the Consumer Confidence Index nudged down to 101.3 in April from 104 in March.
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 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. Of late, the industry participants have been dealing with product cost inflation. Nonetheless, 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: The strategy to sell products at discounted prices has helped industry players draw customers in 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 and 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 in getting the products delivered to consumers’ doorsteps could compound retailers’ woes.
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. Initiatives, such as building omnichannel, 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 the 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 #172, 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 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.
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 2023, the industry’s earnings estimate has declined 7.8%.
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 declined 5.3%. Meanwhile, the Zacks Retail – Wholesale sector has declined 6% and the S&P 500 has been unchanged in the said time frame.
Industry's Current Valuation
On the basis of a forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing retail stocks, the industry is currently trading at 24.65 compared with the S&P 500’s 18.54 and the sector’s 22.12.
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 23.39X.
4 Retail Discount Stores Stocks to Keep a Close Eye On
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 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 6.5% and 13.2%, respectively, from the year-ago reported figure. We note that shares of this Zacks Rank #2 (Buy) company have increased 12.1% in the past six months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Costco: The discount retailer’s key strengths are strategic investments, a customer-centric approach, merchandise initiatives and an emphasis on membership growth. 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.
Costco has a trailing four-quarter earnings surprise of 2.4%, on average. It has an estimated long-term earnings growth rate of 9.2%. The Zacks Consensus Estimate for current financial-year revenues and EPS suggests growth of 6.9% and 9.8%, respectively, from the year-ago reported figure. Shares of this Zacks Rank #3 (Hold) company have risen 4% in the past six months.
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 omnichannel capabilities, come up with new brands, refurbish stores and expand same-day delivery options to provide customers with a seamless shopping experience. These have been contributing to the top line.
Impressively, Target has an estimated long-term earnings growth rate of 14.9%. The Zacks Consensus Estimate for the current financial-year revenues and EPS suggests growth of 2.1% and 39.9%, respectively, from the year-ago reported figure. We note that shares of this Zacks Rank #3 company have declined 1.6% in the past six months.
Dollar General: Due to its value-creating initiatives, defensive product mix and real estate growth strategy, this Goodlettsville, TN-based company has the capabilities to gain market share. Its commitment to better pricing, private-label offerings, effective inventory management and merchandise initiatives should drive sales. We also remain encouraged by the company’s host of initiatives, such as DG Fresh, Fast Track, non-consumables, digitization and private fleet, which should yield same-store sales growth and margin expansion.
Dollar General has an estimated long-term earnings growth rate of 10.6%. The Zacks Consensus Estimate for the current financial-year revenues and EPS suggests growth of 5.8% and 4.8%, respectively, from the year-ago reported figure. Shares of this Zacks Rank #3 company have fallen 11.3% in the past six months.
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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, The TJX Companies, Target and Dollar General
For Immediate Release
Chicago, IL – May 2, 2023 – Today, Zacks Equity Research discusses Costco Wholesale Corp. (COST - Free Report) , The TJX Companies, Inc. (TJX - Free Report) , Target Corp. (TGT - Free Report) and Dollar General Corporation (DG - Free Report) .
Industry: Discount Retail
Link: https://www.zacks.com/commentary/2087347/4-retail-discount-stocks-with-potential-to-beat-industry-blues
Consumer spending activity, which is one of the pivotal factors driving the economy, has somewhat slowed down. This is because inflation and recession-wary shoppers have curtailed spending. Underlying price pressure, a slowing labor market and a higher interest rate environment have cooled demand. Of late, players in the Zacks Retail – Discount Stores industry have been encountering these headwinds.
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 investments to accelerate digitization have been working in favor of companies like Costco Wholesale Corp., The TJX Companies, Inc., Target Corp. and Dollar General Corporation.
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, art and craft supplies, toys and seasonal decor 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
Soft Demand May Hit Revenues: Elevating prices and geopolitical concerns continue to pose a threat to consumer spending activity. Undoubtedly, the industry’s prospects are correlated with the purchasing power of consumers. However, rising prices have been discomforting family budgets. The Fed’s aggressive rate hikes to tame inflation also made things tough for consumers by squeezing disposable income.
Consequently, the demand has softened. Also, concerns related to a slowing economy and a possible recession have hit consumers’ sentiments that slid to a nine-month low in April. Per Conference Board data, the Consumer Confidence Index nudged down to 101.3 in April from 104 in March.
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 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. Of late, the industry participants have been dealing with product cost inflation. Nonetheless, 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: The strategy to sell products at discounted prices has helped industry players draw customers in 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 and 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 in getting the products delivered to consumers’ doorsteps could compound retailers’ woes.
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. Initiatives, such as building omnichannel, 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 the 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 #172, 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 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.
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 2023, the industry’s earnings estimate has declined 7.8%.
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 declined 5.3%. Meanwhile, the Zacks Retail – Wholesale sector has declined 6% and the S&P 500 has been unchanged in the said time frame.
Industry's Current Valuation
On the basis of a forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing retail stocks, the industry is currently trading at 24.65 compared with the S&P 500’s 18.54 and the sector’s 22.12.
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 23.39X.
4 Retail Discount Stores Stocks to Keep a Close Eye On
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 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 6.5% and 13.2%, respectively, from the year-ago reported figure. We note that shares of this Zacks Rank #2 (Buy) company have increased 12.1% in the past six months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Costco: The discount retailer’s key strengths are strategic investments, a customer-centric approach, merchandise initiatives and an emphasis on membership growth. 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.
Costco has a trailing four-quarter earnings surprise of 2.4%, on average. It has an estimated long-term earnings growth rate of 9.2%. The Zacks Consensus Estimate for current financial-year revenues and EPS suggests growth of 6.9% and 9.8%, respectively, from the year-ago reported figure. Shares of this Zacks Rank #3 (Hold) company have risen 4% in the past six months.
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 omnichannel capabilities, come up with new brands, refurbish stores and expand same-day delivery options to provide customers with a seamless shopping experience. These have been contributing to the top line.
Impressively, Target has an estimated long-term earnings growth rate of 14.9%. The Zacks Consensus Estimate for the current financial-year revenues and EPS suggests growth of 2.1% and 39.9%, respectively, from the year-ago reported figure. We note that shares of this Zacks Rank #3 company have declined 1.6% in the past six months.
Dollar General: Due to its value-creating initiatives, defensive product mix and real estate growth strategy, this Goodlettsville, TN-based company has the capabilities to gain market share. Its commitment to better pricing, private-label offerings, effective inventory management and merchandise initiatives should drive sales. We also remain encouraged by the company’s host of initiatives, such as DG Fresh, Fast Track, non-consumables, digitization and private fleet, which should yield same-store sales growth and margin expansion.
Dollar General has an estimated long-term earnings growth rate of 10.6%. The Zacks Consensus Estimate for the current financial-year revenues and EPS suggests growth of 5.8% and 4.8%, respectively, from the year-ago reported figure. Shares of this Zacks Rank #3 company have fallen 11.3% in the past six months.
Why Haven’t You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. 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.