We use cookies to understand how you use our site and to improve your experience.
This includes personalizing content and advertising.
By pressing "Accept All" or closing out of this banner, you consent to the use of all cookies and similar technologies and the sharing of information they collect with third parties.
You can reject marketing cookies by pressing "Deny Optional," but we still use essential, performance, and functional cookies.
In addition, whether you "Accept All," Deny Optional," click the X or otherwise continue to use the site, you accept our Privacy Policy and Terms of Service, revised from time to time.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
4 Retail-Discount Stores to Fend Off Industry Headwinds
Read MoreHide Full Article
Players in the Zacks Retail – Discount Stores industry that have been gaining amid the pandemic-led increased at-home consumption and stock hoarding are likely to witness some pullback in demand in the near term as the process of vaccination rollout has picked up pace. The ease in social-distancing norms and return to active social lifestyle are likely to build up demand for traditional categories. Apart from this, investments associated with digital fulfillment as well as high COVID-related expenses are likely to keep margins under pressure.
Consumers, adding more compelling products, and enhancing digital and data analytics capabilities. Constant efforts to enhance omnichannel operations have been working in favor of Costco Wholesale Corporation (COST - Free Report) and Target Corporation (TGT - Free Report) .
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.
3 Key Retail-Discount Stores Industry Trends
Pandemic-Led Demand Likely to Moderate: While a number of players saw a bump in sales in most parts of 2020, the trend is likely to moderate in the near term. Notably, companies have been benefitting from burgeoning demand (especially online) for essentials due to the pandemic-induced stock hoarding and elevated at-home consumption. Incidentally, higher dine at-home and work-from-home practices boosted demand for groceries and cleaning supplies, among others. However, with the vaccination program on fast lane, consumers are likely to return to the old normal – eating at restaurants, going to office, traveling and other customary practices. This in turn will result in lower at-home consumption activities and a drop in pantry-loading trends. We believe that these factors may weigh on year-over-year sales comparisons in the forthcoming periods.
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. Markedly, Dollar Tree, Inc.DLTR has introduced a Combination Store to serve small towns and rural communities. The company has been receiving favorable response from customers for the same. Meanwhile, the passing of a coronavirus relief package worth $1.9 trillion that entitles eligible Americans to $1,400 stimulus checks is likely to trigger spending across the board. Clearly, demand will not be restricted to a few categories as was noticed when the pandemic hit the economy. The ease COVID-19 restrictions, thanks to a rapid inoculation drive and the return to active social lifestyle, events and occasions are likely to spur demand for traditional categories. Ross Stores, Inc. (ROST - Free Report) , Burlington Stores, Inc.BURL and The TJX Companies, Inc. (TJX - Free Report) are likely to benefit as the economy steadily returns to the pre-pandemic normal.
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. 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.
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 #187, which places it in the bottom 26% 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 February this year, the industry’s earnings estimate for the current year have moved down approximately 5.3%.
Industry vs. Broader Market
The Zacks Retail – Discount Stores industry has underperformed the broader Retail – Wholesale sector and the Zacks S&P 500 composite over the past year.
Stocks in this industry have collectively advanced 47.7% compared with the Zacks S&P 500 Composite’s increase of 70.5% and the Zacks Retail – Wholesale sector’s rise of 67.4% 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 25.67 compared with the S&P 500’s 22.58 and the sector’s 30.47.
Over the last five years, the industry has traded as high as 29.98X and as low as 17.93X, with median being at 20.55X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
3 Retail Discount Stores Stocks to Keep a Close Eye On
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 13.8% in February. 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 February. The company is also on path to gradually provide curbside pickup facility to customers and is currently testing the same at three stores in Albuquerque, NM. Notably, shares of this Zacks Rank #3 (Hold) company have jumped 10% in the past year. The company has a trailing four-quarter earnings surprise of 2.2%, on average. It has an estimated long-term earnings growth rate of 8.8%.
Price and Consensus: COST
Target Corporation: 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 plans to open 100 Ulta Beauty (ULTA - Free Report) at Target shop-in-shops in 2021, with plans to add several more over time. Also, the company is taking its long-drawn relationship with Apple Inc. (AAPL - Free Report) to the next level and has introduced a new Apple shopping destination online and in 17 outlets. Target recently introduced Mondo Llama brand to reinforce its footprint in the crafting space. The company also shared plans to launch its latest food and beverage line ‘Favorite Day’ on Apr 5. Markedly, Target plans to make an investment of about $4 billion annually during 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 53.3%, on average. The company has an estimated long-term earnings growth rate of 10.2%. We also note that shares of this Zacks Rank #3 company have surged 78.4% in the past year. 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. 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 checkout are aimed at providing convenient and contactless shopping experience. Impressively, shares of this Zacks Rank #3 company have advanced 31.1% 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. Notably, the company has a trailing four-quarter earnings surprise of 24.6%, on average. It has an estimated long-term earnings growth rate of 13.7%.
Price and Consensus: DG
+1,500% Growth: One of 2021’s Most Exciting Investment Opportunities
In addition to the stocks you read about above, would you like to see Zacks’ top picks to capitalize on the Internet of Things (IoT)? It is one of the fastest-growing technologies in history, with an estimated 77 billion devices to be connected by 2025. That works out to 127 new devices per second.
Zacks has released a special report to help you capitalize on the Internet of Things’s exponential growth. It reveals 4 under-the-radar stocks that could be some of the most profitable holdings in your portfolio in 2021 and beyond.
View the Zacks #1 Rank List
Image: Bigstock
4 Retail-Discount Stores to Fend Off Industry Headwinds
Players in the Zacks Retail – Discount Stores industry that have been gaining amid the pandemic-led increased at-home consumption and stock hoarding are likely to witness some pullback in demand in the near term as the process of vaccination rollout has picked up pace. The ease in social-distancing norms and return to active social lifestyle are likely to build up demand for traditional categories. Apart from this, investments associated with digital fulfillment as well as high COVID-related expenses are likely to keep margins under pressure.
Consumers, adding more compelling products, and enhancing digital and data analytics capabilities. Constant efforts to enhance omnichannel operations have been working in favor of Costco Wholesale Corporation (COST - Free Report) and Target Corporation (TGT - Free Report) .
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.
3 Key Retail-Discount Stores Industry Trends
Pandemic-Led Demand Likely to Moderate: While a number of players saw a bump in sales in most parts of 2020, the trend is likely to moderate in the near term. Notably, companies have been benefitting from burgeoning demand (especially online) for essentials due to the pandemic-induced stock hoarding and elevated at-home consumption. Incidentally, higher dine at-home and work-from-home practices boosted demand for groceries and cleaning supplies, among others. However, with the vaccination program on fast lane, consumers are likely to return to the old normal – eating at restaurants, going to office, traveling and other customary practices. This in turn will result in lower at-home consumption activities and a drop in pantry-loading trends. We believe that these factors may weigh on year-over-year sales comparisons in the forthcoming periods.
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. Markedly, Dollar Tree, Inc. DLTR has introduced a Combination Store to serve small towns and rural communities. The company has been receiving favorable response from customers for the same. Meanwhile, the passing of a coronavirus relief package worth $1.9 trillion that entitles eligible Americans to $1,400 stimulus checks is likely to trigger spending across the board. Clearly, demand will not be restricted to a few categories as was noticed when the pandemic hit the economy. The ease COVID-19 restrictions, thanks to a rapid inoculation drive and the return to active social lifestyle, events and occasions are likely to spur demand for traditional categories. Ross Stores, Inc. (ROST - Free Report) , Burlington Stores, Inc. BURL and The TJX Companies, Inc. (TJX - Free Report) are likely to benefit as the economy steadily returns to the pre-pandemic normal.
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. 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.
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 #187, which places it in the bottom 26% 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 February this year, the industry’s earnings estimate for the current year have moved down approximately 5.3%.
Industry vs. Broader Market
The Zacks Retail – Discount Stores industry has underperformed the broader Retail – Wholesale sector and the Zacks S&P 500 composite over the past year.
Stocks in this industry have collectively advanced 47.7% compared with the Zacks S&P 500 Composite’s increase of 70.5% and the Zacks Retail – Wholesale sector’s rise of 67.4% 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 25.67 compared with the S&P 500’s 22.58 and the sector’s 30.47.
Over the last five years, the industry has traded as high as 29.98X and as low as 17.93X, with median being at 20.55X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
3 Retail Discount Stores Stocks to Keep a Close Eye On
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 13.8% in February. 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 February. The company is also on path to gradually provide curbside pickup facility to customers and is currently testing the same at three stores in Albuquerque, NM. Notably, shares of this Zacks Rank #3 (Hold) company have jumped 10% in the past year. The company has a trailing four-quarter earnings surprise of 2.2%, on average. It has an estimated long-term earnings growth rate of 8.8%.
Price and Consensus: COST
Target Corporation: 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 plans to open 100 Ulta Beauty (ULTA - Free Report) at Target shop-in-shops in 2021, with plans to add several more over time. Also, the company is taking its long-drawn relationship with Apple Inc. (AAPL - Free Report) to the next level and has introduced a new Apple shopping destination online and in 17 outlets. Target recently introduced Mondo Llama brand to reinforce its footprint in the crafting space. The company also shared plans to launch its latest food and beverage line ‘Favorite Day’ on Apr 5. Markedly, Target plans to make an investment of about $4 billion annually during 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 53.3%, on average. The company has an estimated long-term earnings growth rate of 10.2%. We also note that shares of this Zacks Rank #3 company have surged 78.4% in the past year. 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. 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 checkout are aimed at providing convenient and contactless shopping experience. Impressively, shares of this Zacks Rank #3 company have advanced 31.1% 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. Notably, the company has a trailing four-quarter earnings surprise of 24.6%, on average. It has an estimated long-term earnings growth rate of 13.7%.
Price and Consensus: DG
+1,500% Growth: One of 2021’s Most Exciting Investment Opportunities
In addition to the stocks you read about above, would you like to see Zacks’ top picks to capitalize on the Internet of Things (IoT)? It is one of the fastest-growing technologies in history, with an estimated 77 billion devices to be connected by 2025. That works out to 127 new devices per second.
Zacks has released a special report to help you capitalize on the Internet of Things’s exponential growth. It reveals 4 under-the-radar stocks that could be some of the most profitable holdings in your portfolio in 2021 and beyond.
Click here to download this report FREE >>