6 Must-Own Retail Stocks as Rest of the Sector Slowly Goes Nowhere

Print Email

One key point that has emerged as millions of Americans have returned to work over the past few years is that lower-income spending has increased and remained strong. Given the wage growth, in addition to the job growth, it makes perfect sense. However, despite the solid economic gains, one thing that has become obvious on Wall Street and Main Street, almost regardless of income and status, is that people continue to flock to the giant discount stores.

A new Merrill Lynch report notes that the big six discount stores posted solid results over the past three weeks. That is in sharp contrast to the many retailers posting very disappointing first-quarter results. Merrill has dubbed the current trend of consumers frequenting the discount giants as the “Discount Store Decade.”

The report mentions six companies. All have Buy ratings, and they make good sense for investors who like retail but want to stay with the companies performing well.

BJ’s Wholesale

This is the newest entrant to the discount superstore club, having gone public back in 2018. BJ’s Wholesale Club Holdings Inc. (NYSE: BJ) operates 180 warehouse clubs in 15 states, primarily in the eastern United States and Florida. BJ’s offers its members brand-name and private label food, general merchandise, gasoline and other specialty offerings.

The company posted very solid results in late May, and Merrill noted this:

BJ’s fiscal first quarter comparisons of 1.9% were above our 1.5% estimate despite SNAP shift headwinds, adjusted EPS of $0.26 was broadly in line. Merchandise margins ex-fuel expanded roughly 30 basis points year over year and we see support for continued comparison momentum & gross margin improvement in fiscal 2020. We reiterate our Buy rating on outlook for membership growth, merchandising momentum, and Discount Store Decade tailwinds.

The Merrill price target for the stock is $35, while the Wall Street consensus target is $30.14. Shares closed Wednesday at $24.74. Investors should note the company announced after Wednesday’s close a follow-on stock offering that could weigh on shares.

Costco Wholesale

This has become the ultimate destination for the American consumer regardless of the economy. Costco Wholesale Corp. (NASDAQ: COST) has a unique business model. It operates membership warehouses and it buys the majority of its merchandise directly from manufacturers, essentially cutting out the middleman. Costco sells in bulk but also at a lower price, thus fueling its rapid growth. With consumers having more free cash to spend with gasoline prices still low, this major retailer may continue to see large revenue gains.

Costco remains one of the few conventional retailers where metrics like store traffic, market share gains and a validated model could bode well for international growth and expansion. The company is largely unharmed by e-commerce, and it continues to add stores in strategically mapped out locations.

Wall Street loves the company’s pricing authority on key items and the leading merchandising offerings, and the relatively new Costco co-branded card with Visa is a real positive. Add in the company’s growing online presence and the future looks bright.

Costco shareholders receive a 1.09% dividend. Merrill has a $270 price target, and the consensus target is $250.17. Shares closed most recently at $247.96.

Dollar General

This low-cost retail store leader’s shares had a big run recently after stellar earnings. Dollar General Corp. (NYSE: DG) is the largest discount store chain in the United States by revenue and second largest by store count. The company generated roughly $27.5 billion in revenue in 2018 and operates more than 14,500 stores in 44 states offering an assortment of everyday items, including highly consumable merchandise, seasonal, home products and basic apparel.

The company also nailed earnings in late May. Merrill said this:

Fiscal first quarter adjusted EPS of $1.48 beat our estimate by 15c. Comparisons of 3.8% reflected the company’s strong execution on replenishment/in-stock initiatives. We raise our fiscal 2020 EPS by 5c to $6.40 on first quarter upside, but trim our estimates for the balance of fiscal on the ramp up of investments. We reiterate Buy and raise price objective.

Investors receive a 0.95% dividend. The new Merrill price target is $145. The consensus figure is $125.54, and shares closed at $130.40 on Wednesday.