4 Stocks to Tap Rising Demand in Retail Discount Stores Space

The COVID-19 outbreak has brought about a major shift in consumers’ buying behavior and spending pattern. With the pandemic taking a toll on employment and household income, consumers are left with no option but to curtail spending. Definitely, measures undertaken to support households and the resumption of economic activities provided some relief but consumers’ hunt for better bargains continue.

Under the current circumstances, people have been showing a preference for discount stores for essentials and other household needs. A differentiated product range resonates well with customers’ spending habits. No wonder, the strategy to sell products at discounted prices has helped industry players expand customer base amid the pandemic.

That said, industry participants have been focusing on deepening engagements with consumers, expanding merchandise assortments, and enhancing digital and data analytics capabilities. They have been making strategic investments to provide consumers fast, convenient and safe shopping experience, be it offline or online.

Keeping in mind consumers’ product preferences and growing inclination toward online shopping, thanks to social distancing and greater stay at-home trends, discount players have been replenishing shelves with in-demand merchandise, and expanding delivery options — curbside pickup or ship-to-home orders — and contactless payment solutions. The companies have also been investing in renovation, improved checkouts and mobile point-of-sale capabilities to keep stores relevant.

It comes as no surprise that discount retailers have succeeded in creating a niche in the retail space. Here we have highlighted four discount retailers that have been gaining from coronavirus-led spike in demand.

4 Prominent Players

Target Corporation TGT: This general merchandise retailer has been making investments to enhance omni-channel capacities, come up with new brands, and remodel or refurbish stores to cater to consumer demand and behavior in the new normal. Markedly, this Zacks Rank #1 (Strong Buy) company witnessed sturdy market-share gains in all five core merchandise categories during second-quarter fiscal 2020 courtesy of strong demand. Consumers splurged on office items, video games, décor, domestics and kitchenware as they work, learn, dine and play at home.

Comparable sales for the quarter increased 24.3%, backed by a 18.8% jump in average basket as consumers consolidated trips amid the pandemic. The number of transactions rose 4.6%. Digital comparable sales soared 195% and added 13.4 percentage points to comparable sales. Same-day services (Order Pick Up, Drive Up and Shipt) skyrocketed 273% and accounted for roughly 6 percentage points of total comparable sales growth. Notably, the Zacks Consensus Estimate for current financial year sales and earnings suggests an improvement of 12.4% and 11.9%, respectively, from the year-ago period. You can see the complete list of today’s Zacks #1 Rank stocks here.

Big Lots, Inc. BIG: This Zacks Rank #2 (Buy) company recently provided a business update for third-quarter fiscal 2020. Management cited that it has been witnessing robust sales, which is likely to help deliver a sturdy quarterly performance. Encouragingly, this positions the company well ahead of the holiday season — the most crucial part of the year for retailers. Notably, the company’s growth strategies, including Operation North Star, and its strong assortment and early reads on Christmas are aiding customer acquisition. Management anticipates comparable sales growth in mid-teens for the third quarter.

Based on impressive sales view, Big Lots envisions third-quarter earnings in the bracket of 50-70 cents per share against a loss of 18 cents reported in the year-ago quarter. The company is leaving no stone unturned with respect to leveraging marketing strategies and expanding its e-commerce platform. Impressively, it is experiencing strong e-commerce growth, buoyed by the success of the Buy-Online, Pick-up-In-Store functionality. Notably, Big Lots also partnered with Instacart to expedite same-day delivery service. Further, the company is on track with its pantry-optimization initiative. Markedly, the Zacks Consensus Estimate for current financial year sales and earnings indicates an improvement of 15.8% and 110.6%, respectively, from the year-ago period.

Dollar General Corporation DG: Better pricing, private label offerings, effective inventory management, and merchandise initiatives have been aiding this Goodlettsville, TN-based company’s performance. After increasing 21.7% in the first quarter, same-store sales surged 18.8% year over year during second-quarter fiscal 2020, primarily owing to rise in average transaction amount. Consumables, Seasonal, Apparel and Home categories favorably impacted the metric.

Change in consumer behavior owing to the coronavirus pandemic had a favorable impact on the company’s performance. Dollar General informed that since the end of the second quarter, it has continued to witness “elevated demand” across its stores. Consequently, from Aug 1 through Aug 25, same-store sales have risen roughly 15% compared with prior-year period. In order to increase traffic, this Zacks Rank #3 (Hold) company has been focusing on both consumables and non-consumables categories. It has also been offering better-for-you products at affordable prices. Additionally, it has been expanding cooler facilities to enhance the sale of perishable items. We note that the Zacks Consensus Estimate for current financial year sales and earnings suggests an improvement of 18.5% and 48.6%, respectively, from the year-ago period.

Costco Wholesale Corporation COST: This Issaquah, WA-based company’s (COST) growth strategies, better price management, decent membership trends and increasing penetration of e-commerce business have been contributing to its upbeat performance. Thanks to its status of “essential retailers,” this Zacks Rank #3 company has been benefiting from increased demand. Cumulatively, these factors have been aiding this operator of membership warehouses in registering impressive comparable sales run. Costco registered comparable sales growth of 13.2% during the month of August. This followed an improvement of 13.2% and 11.5% in the months of July and June, respectively.

The company has been rapidly adopting the omni-channel mantra to provide a seamless shopping experience, whether online or in stores. Consumers’ increased shift to online purchasing owing to the coronavirus outbreak seems to have worked in favor of Costco. We note that e-commerce comparable sales soared 101.9% during the month of August. This followed an increase of 75.3%, 85.8% and 106.2% in the months of July, June and May, respectively. Notably, the Zacks Consensus Estimate for current financial year sales and earnings indicates an improvement of 7.4% and 7.9%, respectively, from the year-ago period.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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