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

June 6, 2019 by Lee Jackson

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.

Dollar Tree

This bargain retailer was hit hard back in early May and could be offering a very compelling entry point. Dollar Tree, Inc. (NASDAQ: DLTR) is one of the largest dollar store chains in the United States, with nearly $23 billion in revenues in 2018.

The company operates 15,237 stores in 48 U.S. states and five provinces in Canada under the Dollar Tree, Family Dollar and Dollar Tree Canada banners, and the stores carry an assortment of consumables, general merchandise and seasonal products.

Given the spike in purchasing from lower-income consumers, this could be a huge positive for Dollar Tree, given the company’s big presence in the discount market.

The $115 Merrill price target compares with $111.40 the consensus target. Shares closed at $100.29 apiece.

Target

This remains a solid and safe retail total return play now, and it resides on the Merrill Lynch US 1 list. Target Corp. (NYSE: TGT) is one of the largest discount retailers in the United States, operating roughly 1,800 Target stores across the country. The company sells merchandise in its Signature Categories Style, Baby, Kids and Wellness, as well as other products in both physical Target stores and online at Target.com.

Since 2017, Target has poured tons of money into its e-commerce offerings, overhauling its stores and refreshing its inventory to better compete against Amazon. Target has even embraced the same-day delivery concept and is expanding retail floor space for toys as it looks to scoop market share after the closing of Toys “R” Us.

Solid numbers and a very positive analysts day had the Merrill analysts noting that they believe the company’s ability to moderate fulfillment costs through its “stores as hubs” model should drive margin improvement in fiscal 2020. They also feel the valuation is compelling at current levels.

Shareholders receive a 3.18% dividend. Merrill Lynch has set a $105 price objective, well above the $86.60 consensus target. Shares closed at $85.49.

Walmart

The giant retailer has rallied nicely off the April lows but still has upside. Walmart Inc. (NYSE: WMT) is the world’s largest retailer, operating retail stores under the formats of Walmart Stores, Supercenters, Neighborhood Markets, as well as Sam’s Club locations, in the United States, and it has a growing e-commerce business (including Jet.com). Internationally, Walmart also operates locations in several countries, including Argentina, Brazil, Canada, China, Japan, Mexico and the United Kingdom.

Each week, nearly 260 million customers and members visit the company’s 11,535 stores under 72 banners in 28 countries and e-commerce sites in 11 countries. With fiscal year 2019 revenue of $515 billion, Walmart employs approximately 2.2 million associates worldwide.

The company announced last summer its plans to acquire a 77% stake in India’s e-commerce retailer Flipkart in a $16 billion debt and cash transaction. The deal dramatically expands Walmart’s presence in India, where online retail is growing quickly and Flipkart is a leader.

Shareholders received a 2.1% dividend. The Merrill Lynch price target is $120. The consensus target is $108.47, and shares ended Wednesday at $104.42 apiece.

Six of the biggest retailers are continuing to fight and win against the huge online presence of Amazon. Consumers continue to show loyalty to all six, and they may be poised to have big summer selling seasons, with consumer confidence continuing to be very solid and their earnings looking good as well.

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