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 players in the industry operate commercial warehouse clubs with membership, offering branded and private label products in a range of merchandise categories.
Let’s take a look at the four major industry themes:
The outlook for the industry is correlated with the purchasing power of consumers. Consumer spending, one of the critical factors shaping the economy, has regained momentum with Americans returning to the streets after the coronavirus-induced lockdown eased. Undoubtedly, the gradual reopening of the economy and measures taken to support households such as stimulus checks and increased unemployment benefits have boosted demand. As a result, US retail sales rebounded sharply in May, increasing 17.7% – the highest since 1992. However, market experts have warned that the road to recovery looks long and bumpy, reckoning. given the millions of job losses since February, the historically high unemployment rate of 13.3% and the resurgence of coronavirus cases that could lead to the cancellation of reopening plans.
The strategy of selling products at discounted prices has helped industry players expand their customer base, which includes low to middle income groups. Under the current circumstances, people display a preference for discount stores for the essentials or other everyday purchases. Clearly, a differentiated product line resonates well with customers’ consumption habits. It is true that some of the industry participants such as Burlington Stores, Inc. (BURL), Ross Stores, Inc. (ROST) and The TJX Companies, Inc. (TJX) have been affected by the temporary store closures in due to the pandemic. it has also resulted in a paradigm shift in consumer buying behavior. People have now started buying more essentials rather than discretionary purchases, benefiting players like Dollar Tree, Inc. (DLTR). Now, with the gradual reopening of stores, businesses are seeing improved levels of traffic and sales. Matthew Shay, chief executive of the National Retail Federation, said: âThe most important thing now is to keep these retail stores open and not penalize them by closing their doors in the event of a coronavirus outbreak. “
With the evolution of consumer purchasing habits and behavior, industry players are playing a dual role in-store and online. In fact, companies’ digital activities played a key role amid the lockdown. Certainly, companies are committed to meeting the challenges of the pandemic. In this regard, industry players are directing resources to digital platforms, accelerating fleet optimization, increasing the supply chain and focusing on improving financial flexibility. Industry players are also focusing on superior product strategy and improving omnichannel capabilities. In the current situation, companies even offer a contactless delivery option, low contact pickup service, and door-to-door orders. They also use contactless payment solutions. Companies are investing in renovations, improvements to checkouts and mobile point-of-sale capabilities to maintain store relevance.
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. Other than that, any deleveraging from SG&A fees, higher labor and occupancy costs, and increased marketing and other store-related expenses could put pressure on margins. Industry experts have pointed out that companies’ bottom line could be affected by additional payments and benefits to employees as well as investments made to safeguard the safety and health of customers and team members amid the crisis. coronavirus crisis. Again, the shift in the channel mix towards digital execution, the shift to lower margin categories, and declining sales of higher margin discretionary items are likely to hurt margins. Nevertheless, companies control costs, optimize inventory and prioritize capital expenditure.
Zacks’ Industry Rankings Shows Bright Prospects
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 # 37, which places it in the top 15% 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 good prospects 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 top 50% of industries ranked by Zacks is the result of positive earnings prospects for all of the constituent companies. Looking at revisions to aggregate earnings estimates, it appears that analysts are gradually becoming optimistic about earnings growth for this group. Since the start of June 2020, the industry’s profit estimate for the current year has increased by around 1.1%.
We will present a few stocks that have the potential to outperform the market based on a strong earnings outlook. 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 underperformed the Retail – Wholesale sector at large, but has outperformed the Zacks S&P 500 composite over the past year.
Shares in this industry collectively rose 10% from the 2.1% increase in Zacks S&P 500 Composite and 18% rise in Zacks’ retail and wholesale sector over the past year. 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 27.54 versus 21.53 for the S&P 500 and 32, 26 for the sector.
Over the past five years, the industry has traded as low as 30.22X and as low as 17.93X, with a median at 20.07X, as shown in the chart below.
Price / earnings ratio (over the past 5 years)
The COVID-19 crisis is a litmus test for all consumer-driven industries. Better pricing, effective inventory management, and business and operational initiatives are expected to increase revenues for industry constituents. However, fierce competition and the costs associated with promotional activities are major disincentives. Additionally, investments in compensation and benefits for frontline team members, shifting channel mix to digital execution, and shifting to low-margin categories are likely to maintain margins. under pressure.
That said, we present two stocks from the Retail – Discount Stores sector that are well positioned to outperform the market. Of these, the first stock carries a Zacks Rank # 1 (strong buy) and the next one carries a Zacks Rank # 2 (buy). You can see The full list of today’s Zacks # 1 Rank stocks here.
Large lots, Inc. (WHOLESALE): Shares of this liquidating retailer have jumped about 53% in one year. Zacks’ consensus estimate for the company’s current fiscal EPS has climbed 12.3% in the past 30 days. The company has a surprise positive earnings for the last four quarters of 62.2%, on average, and an estimated long-term earnings growth rate of 7.1%.
Price and consensus: WHOLESALE
Societe Generale Dollar (DG): For this discount retailer, the consensus EPS estimate for the current fiscal year has increased 2.6% in the past 30 days. In addition, the company has a surprise positive earnings for the last four quarters of 16.9% on average. The stock, which rose about 39.4% in a year, has an estimated long-term earnings growth rate of 12.4%.
Price and consensus: DG
We also present two stocks with a Zacks Rank # 3 (Hold) that investors can currently hold in their portfolio.
Wholesale company Costco (COST): This membership warehouse operator has a surprise positive earnings for the past four quarters of 1.9%, on average. The stock, which gained around 12.5% ââduring the year, has an estimated long-term earnings growth rate of 8.4%.
Price and consensus: COT
Target company (TGT): Shares of this general merchandise retailer have gained about 34.6% in a 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 6.1%. It has a surprise positive earnings for the last four quarters of 14.4% on average.
Price and consensus: TGT
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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
Big Lots, Inc. (BIG): Free Stock Analysis Report
Amazon.com, Inc. (AMZN): Free Stock Analysis Report
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