Discount stores

Discount Retail Store Industry Outlook: Margin Issues


Zacks Retail – Discount Stores segment includes businesses that offer clothing, accessories, footwear, beauty products, personal and baby care products, cleaning products, pet supplies and food products. and drinks. Industry participants also provide home textiles, home furnishings, housewares, toys and seasonal decor products. These companies sell their products through stores or digital channels or both. Some of the industry players operate commercial warehouse clubs offering branded and private label products in a range of merchandise categories. Some of the prominent names in the industry are Dollar Tree, Inc. (DLTR), Dollar General Corporation (DG) and The TJX Companies, Inc. (TJX).

Let’s review the three major themes of the industry:

  • The outlook for the industry is correlated with the purchasing power of consumers. Apparently, the strengthening labor market and rising disposable income have fueled consumer spending. The strategy of selling products at discounted prices has helped industry players expand their customer base, which includes low to middle income groups. In addition, a differentiated range of products in line with customers’ consumption habits allows companies to enrich the shopping experience, leading to market share gains and sales per square meter.

  • Industry players are regularly developing omnichannel capabilities, which include technology updates and store redesigns. They are undertaking brand improvement efforts with discounted models and an innovative, user-friendly approach, such as same day delivery options, to make the most of the holiday season ahead. These efforts, coupled with a compelling history of growing stores in convenient locations and a focus on demand-driven products, motivate industry participants. Better pricing, effective inventory management, and business and operational initiatives are expected to increase revenues for industry constituents during the holiday season.

  • Companies in the industry compete for a greater share on attributes such as price, products and speed to market. Additionally, the growing dominance of Amazon (AMZN) has made the retail space very competitive. This has forced a number of players to strengthen their digital ecosystem and increase their shipping and delivery capabilities. While these efforts drive sales, they come with high costs. Apart from that, any deleveraging from selling and administration costs, higher labor and occupancy costs, and increased marketing and other store-related expenses could also put pressure on companies. margins. Nevertheless, companies resort to cost containment. Once again, the imposition of trade tariffs due to the trade war between the United States and China could affect the short-term results of some companies in this industry.

Zacks industry rankings show bleak outlook

The retail industry of Zacks – Discount Stores is housed within the larger retail industry of Zacks – Wholesale. The industry currently holds a Zacks Industry Rank # 160, which places it in the lowest 37% of over 250 Zacks industries.

The group’s Zacks Industry Rank, which is essentially the average of the Zacks Rank of all member stocks, indicates a bleak outlook for the near term. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the bottom 50% of industries ranked by Zacks is the result of negative earnings prospects for the constituent companies as a whole. Looking at the revisions to the overall earnings estimates, it appears that analysts are gradually losing confidence in the earnings growth potential of this group. Since December 2019, the industry’s profit estimate for 2020 has declined by approximately 3.1%.

Despite the bleak near-term outlook for the industry, we will present a few stocks that can be bought or held. But it’s worth looking first at the industry’s shareholder returns and the current valuation.

Industry vs. larger market

The Zacks Retail – Discount Stores industry has outperformed both the broader Retail – Wholesale industry and the Zacks S&P 500 composite over the past year.

Shares in this industry collectively rose 38.7% from the 18.7% increase in Zacks S&P 500 Composite and the 16.3% gain in Zacks Retail – Wholesale over the same period.

One-year price performance

Current industry assessment

Based on the 12-month forward price-to-earnings (P / E) ratio, which is commonly used to value retail stocks, the sector is currently trading at 24.49 versus 19.09 for the S&P 500 and 25, 78 for the sector.

Over the past five years, the industry has traded as low as 24.49X and as low as 17.95X, with a median at 20.07X, as shown in the chart below.

Price / earnings ratio (over the past 5 years)

Final result

Discount retailers have managed to create a niche despite the growing popularity of online retailers which has impacted many traditional operators. They mainly thrive on investments, focus on cost savings and the introduction of loyalty and marketing programs. However, the costs associated with promotional activities and an aggressive pricing strategy due to fierce competition are major deterrents.

With that said, we present four Retail Industry stocks – Discount Stores, which are well positioned to capitalize on opportunities. Of these four actions, the first two carry a Zacks Rank # 2 (Buy) and the other two carry a Zacks Rank # 3 (Hold). You can see The full list of today’s Zacks # 1 Rank (Strong Buy) stocks here.

Wholesale company Costco (COST): For this member warehouse operator, the consensus estimate of EPS for the current fiscal year has increased by 4 cents over the past 30 days. In addition, the company has a surprise positive earnings for the last four quarters of 7.8% on average. The stock, which has gained around 44% during the year, has an estimated long-term earnings growth rate of 8.1%.

Price and consensus: COT

Burlington Stores, Inc. (BURL): Shares of this branded clothing retailer have jumped about 44% in one year. Zacks’ consensus estimate for the company’s current fiscal EPS has risen 5 cents in the past 30 days. The company has a surprise positive earnings for the last four quarters of 7.6% on average.

Price and consensus: BURL

Target company (TGT): Shares of this general merchandise retailer are up about 57% in one year. Zacks’ consensus estimate for the company’s current fiscal EPS has remained stable over the past 30 days. The company has an estimated long-term profit growth rate of 7.5%. The company has a surprise positive earnings for the past four quarters of 8.6%, on average.

Price and consensus: TGT

Ross Stores, Inc. (ROST): For this operator of discount clothing and home fashion stores, the consensus EPS estimate for the current fiscal year has been stable over the past 30 days. In addition, the company has a surprise positive earnings for the last four quarters of 3.8% on average. The stock, which rose about 29% in one year, has an estimated long-term earnings growth rate of 10.5%.

Price and consensus: ROST

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The TJX Companies, Inc. (TJX): Free Stock Analysis Report

Target Corporation (TGT): Free share analysis report

Ross Stores, Inc. (ROST): Free Stock Analysis Report

Dollar Tree, Inc. (DLTR): Free Stock Analysis Report

Dollar General Corporation (DG): Free share analysis report

Costco Wholesale Corporation (COST): Free Inventory Analysis Report

Burlington Stores, Inc. (BURL): Free Stock Analysis Report

Amazon.com, Inc. (AMZN): Free Stock Analysis Report

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