Discount stores

Discount stores are the winners as retailers report revenue

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Photograph by Cesar Rodriguez/Bloomberg


As the second quarter earnings season draws to a close, the retail sector continues to divide into winners and losers, and not always where one would expect.

In recent quarters, the winners have been chains that offer consumers a distinct value proposition or make shopping particularly easy, online or in person. The trend towards convenience and low prices has lifted discounters and big box stores, but left other retailers in a riskier position, continually having to prove themselves otherwise.


best buy

(BBY), for example, fell 8.8% on Thursday, even after reporting better-than-expected earnings. The problem was that sales growth at stores open for at least a year was below expectations, while results were weak in key categories like games. Investors chose to ignore a surge in home appliance sales, a trend that likely isn’t sustainable as Best Buy competes with


walmart

(WMT) and


Target

(TGT) in this category. And the tariffs could cause the chain a particularly big headache: imports from China account for 60% of its cost of goods, estimates Wells Fargo analyst Zachary Fadem. No wonder Best Buy lowered the upper end of the sales range it forecast for the full year, implying it could face some challenges over the holiday season.

Other specialists also struggled.

Tiffany (TIF) wavered on Wednesday after management reported higher-than-expected profits, but said pro-democracy protests in Hong Kong had disrupted business there, among other challenges. Stocks ended the day higher, but were only up 6% for the year.


Ultimate Beauty

(ULTA), which we recommended in this space last week (and wish we hadn’t), fell nearly 30% after it missed earnings guidance and lowered its forecast. “For a company that has been one of the most consistent models in our universe for the past five-plus years, today’s results were about as shocking as one could imagine,” said writes Wells Fargo analyst Ike Boruchow on Thursday. He demoted Ulta to Market Perform from Outperform.

Discounters, however, continue to impress Wall Street. Dollar stores and their ilk have proven they can thrive in good times and bad, and are among the few retail concepts that continue to thrive.

“In a somewhat volatile consumer sector environment, we are seeing an increased investor appetite for recession-resistant and defensive stories,” wrote Credit Suisse analyst Judah Frommer.


five below

(FIVE) was up 5.2% on Thursday afternoon, although same-store sales were below analysts’ expectations. Also Thursday,


General dollar

(DG) announced much better than expected results, pushing the stock up 10%.


Burlington Stores

(BURL), another Barrons choice, climbed 18%.

Investors have been impressed with how discount chains are handling the impending tariffs. All depend on China for their goods to one degree or another, but have clearly redesigned their supply chains. “We negotiated price concessions, canceled orders, changed specifications, evolved the product line and diversified suppliers,” said Gary Philbin, CEO of


dollar tree

(DLTR), which fell 1.2% after reporting mixed earnings.

But among its peers, Dollar General is likely to weather the storm better. He doesn’t get as many goods from China.

“We believe Dollar General is in a unique position, relative to most retailers, to manage these rates for three reasons,” wrote Guggenheim analyst John Heinbockel. “First, it operates with a sales mix heavily skewed towards consumables – 75% – which are not subject to Chinese tariffs. Second, we believe it has good earnings momentum (3%-4%) to leverage most operating costs. Third, it will make significant promotional investments during the fourth quarter, which should boost profitability during the most important period of the year. »

When it comes to retail, the best bets are always in the stories with the best deals.

Write to Avi Salzman at [email protected]