For Immediate Release
Chicago, IL – July 23, 2021 – Today, Zacks Equity Research discusses Discount Retail including Costco Wholesale Corporation COST, Target Corporation TGT, Dollar General Corporation DG, Burlington Stores, Inc. BURL and Dollar Tree, Inc. DLTR.
A favorable consumer environment and strategic endeavors undertaken at company levels are working in tandem for the Zacks Retail – Discount Stores industry. It goes without saying that the industry’s prospects are closely tied to the purchasing power of consumers. In fact, a strengthening labor market, stepped-up vaccination drives and record savings are forming a perfect base for higher consumer spending.
Meanwhile, industry participants have been focusing on deepening engagements with consumers, adding more compelling products, and enhancing digital and data analytics capabilities. Constant efforts to enhance omni-channel operations have been working in favor of Costco Wholesale Corp., Target Corp., Dollar General Corp. and Burlington Stores.
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 of the industry players operate membership shopping warehouse clubs, offering branded and private-label products in a range of merchandise categories.
Well, most discount stores are gradually emerging as a one-stop shopping destination. The profitability of players is dependent upon a prudent pricing model, well-organized supply chain and effective merchandising strategy.
4 Key Retail-Discount Stores Industry Trends
Consumers’ Willingness to Spend: The industry’s prospects are correlated with the purchasing power of consumers. Undeniably, stimulus package, mass inoculation and relaxation in government restrictions are stimulating demand. We note that record household savings coupled with payments under the Child Tax Credit program to qualifying families running from July through December is likely to boost consumer spending.
Again, a healing job market is acting as a tailwind. A look at the data released by Mastercard SpendingPulse suggests a stellar back-to-school season for retailers, as more children head back to the classrooms.
Sales during the back-to-school period — Jul 15 through Sep 6 — are anticipated to increase 5.5% from last year and 6.7% from 2019. Industry participants have been focusing on deepening engagements with consumers, creating innovative and compelling products, and enhancing digital and data analytics capabilities.
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. Under the current circumstances, people in the low-to-middle income groups have been showing preference for discount stores. Clearly, a differentiated product range resonates well with customers’ spending habits.
Dollar Tree has introduced a Combination Store to serve small towns and rural communities. The company has been receiving favorable responses from customers for the same. We note that demand is not restricted to a few categories as was noticed when the pandemic hit the economy. The return to active social lifestyle, events and occasions has spurred demand across myriad categories.
Digitization Key to Growth: With the change in consumer shopping pattern 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 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. 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.
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. That said, sustained cost-containment measures are needed to be put in place for managing margins.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Retail – Discount Stores industry is housed within the broader Zacks Retail – Wholesale sector. The industry currently carries a Zacks Industry Rank #8, which places it in the top 3% 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 encouraging 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 top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence on this group’s earnings growth potential.
Since the beginning of 2021, the industry’s bottom-line estimate for the current financial year has jumped almost 9.6%. Notably, earnings estimates for the next financial year have moved up 6.1% during the aforementioned period.
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 41.4% compared with the Zacks S&P 500 Composite’s increase of 36.2% and the Zacks Retail – Wholesale sector’s rise of 10.1% 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 25.44 compared with the S&P 500’s 21.62 and the sector’s 28.39.
Over the last five years, the industry has traded as high as 29.41X and as low as 17.93X, with the median being at 20.7X.
4 Retail Discount Stores Stocks to Keep a Close Eye On
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 focus on consumable and non-consumable categories are noteworthy.
The company 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. Moreover, initiatives such as DG Pickup and DG GO! mobile checkouts are aimed at providing a convenient and contactless shopping experience.
Shares of this Zacks Rank #1 (Strong Buy) company have advanced 17.9% in the past year. The stock may scale new highs with solid prospects, brand recognition and strategic endeavors such as the new store concept, popshelf. The company has a trailing four-quarter earnings surprise of 18.1%, on average. It has an estimated long-term earnings growth rate of 11.3%.
The Zacks Consensus Estimate for its current-fiscal earnings per share (EPS) has been stable in the past 30 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Burlington Stores: This New Jersey-based company has been gaining from its strategic endeavors, including the Burlington 2.0 off-price initiative. Via this strategy, the company focuses on three aspects, marketing, merchandising and store prototype. Management had earlier raised its long-term store target to 2,000 stores from 1,000, given the smaller store format enabled by the 2.0 strategy.
Moreover, it has been strengthening vendor counts, making technological advancements and focusing on localized assortments. We note that shares of this Zacks Rank #1 company have soared more than 70% in the past year. Also, the Zacks Consensus Estimate for its current-fiscal EPS has risen 2.5% in the past 30 days. Impressively, the company has a trailing four-quarter earnings surprise of 74.7%, on average.
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 registered comparable sales growth of 14.1% in June. The company has been rapidly adopting the omni-channel mantra to provide a seamless shopping experience, whether online or in stores. We note that its e-commerce comparable sales soared 20.8% during the month of June.
The company, in collaboration with Uber, launched grocery delivery pilots in 25 locations across Texas. Notably, shares of this Zacks Rank #2 (Buy) company have jumped 31.6% in the past year. The company has a trailing four-quarter earnings surprise of 7.7%, on average. It has an estimated long-term earnings growth rate of 9.1%. The Zacks Consensus Estimate for its current-fiscal EPS has moved up 0.7% in the past 30 days.
Target: This general merchandise retailer has been making investments to enhance omni-channel capabilities, come up with new brands, refurbish stores and expand same-day delivery options to provide a seamless shopping experience to customers. Markedly, the company has been making multiple changes to its business model to adapt and stay relevant in the ever-evolving retail landscape.
Target is always striving to build on its partnerships, especially with popular and high-profile brands. In this context, the company will begin rolling out Ulta Beauty shop-in-shops across more than 100 stores nationwide this August, with plans to add approximately 800 stores in the coming years. Target plans to make an investment of about $4 billion annually over the next several years to ramp up store openings and remodels, scale up fulfillment services and enhance supply chain capabilities, keeping speed and convenience in mind.
Impressively, Target has a trailing four-quarter earnings surprise of 62.1%, on average. The company has an estimated long-term earnings growth rate of 13.3%. The Zacks Consensus Estimate for its current-fiscal EPS has risen 2.7% in the past 30 days. We also note that shares of this Zacks Rank #2 company have surged 112.7% in the past year.
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