In this article, we will look at the 7 Best Department Store Stocks to Buy According to Hedge Funds.
Holiday Season Trends in the Retail Industry
With the holiday season approaching, discussions and concerns about expected consumer spending are increasing. According to Deloitte’s annual holiday survey, shoppers are feeling more optimistic despite concerns about inflation, and are planning to increase their holiday spending by 8% year over year. On October 19, Brian McCarthy, Principal of Retail Strategy and Transformation at Deloitte, joined Brad Smith on Yahoo Finance’s Wealth! to discuss what he calls an expected record-breaking shopping season.
As per Deloitte’s latest holiday retail survey, consumers are planning to spend more money in this year’s holiday season, primarily due to a “rosier economic outlook.” He says that we are seeing a 9 percentage point increase in positivity towards the economy’s future. In addition, the overall consumer perception of higher prices is also a factor, with around 70% of shoppers believing that their prices for gifts in 2024 will be higher than in 2023.
Retail executives are also optimistic about the upcoming season, with 80% expecting to see stronger sales both online and in brick-and-mortar. As per the survey, consumers plan to spend a record-high average of around $1,778 this year, with the average consumer spending experiencing an 8% increase from the 2023 survey. These trends are expected to emerge despite the inflationary and price pressures that some consumers have cited. McCarthy told Yahoo Finance:
“We’re seeing after this year of frugality and restraint, consumers are feeling a bit more optimistic about the economy. They’re planning to have a very festive holiday season.”
The Brand Loyalty Crisis of the Season
An interesting brand loyalty crisis is also emerging this holiday season. Consumers are looking for better prices and deals instead of going back to the brands they always shop at. They are looking for the best value and are generally inching away from brand loyalty, prioritizing quality and price over brand names and tags. According to McCarthy, consumers seek quality, value, and variety when they go holiday shopping. He says that:
“With the perception of higher prices still top of mind, consumers are really caught between trying to stretch their wallets and being festive and so this really means they’re torn between seeking value and remaining loyal.”
He further says that around two-thirds of consumers are expected to switch brands if they find the price too high, and around 50% are willing to switch retailers to save. In addition, 78% of shoppers plan to participate in promotional events this October and November. Trends also show that privately labeled brand sales are expected to grow faster than national brand sales this year.
He suggests that retailers must ensure that they provide good quality, good value price points, and a variety of selection that attracts consumers. He also offers advice to consumers looking to save some dollars without slashing items from their holiday list, saying that:
“Shoppers are encouraged to explore multiple retailers to look for a competitive deal or a price point that they think is going to work for them.”
He adds,
“I have found AI is a really interesting thing to start asking for where you may find particular products or promotional deals so you can use technology to be a bit more savvy that way.
We recently published an article on the 10 Cheap Retail Stocks to Buy According to Analysts. Here is an excerpt from the article:
“According to the WTW Global Retail Survey for 2024, around 52% of retailers this year expect increased profitability in the coming two years. In addition, approximately 48% of retailers are looking to leverage artificial intelligence in their operations to offer their customers a personalized and efficient shopping experience. However, with more and more businesses turning towards AI, around 43% of the respondents voiced concerns about high cybersecurity risks likely to arise with increasing reliance on new technologies. Despite the risks, a majority of retailers are incorporating AI into their operations, streamlining and expediting their functioning”.
With these trends in mind, let’s examine the 7 best department store stocks to buy according to hedge funds.
7 Best Department Store Stocks to Buy According to Hedge Funds
Our Methodology
To compile a list of the 7 best department store stocks to buy according to hedge funds, we consulted the Finviz and Yahoo Finance stock screener to compile a list of the top 15 department store stocks. We then choose the top 7 stocks with the most number of hedge funds. The list of the 7 best department store stocks to buy according to hedge funds is arranged in ascending order of number of hedge fund holders as of Q2 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
7 Best Department Store Stocks to Buy According to Hedge Funds
7. Nordstrom, Inc. (NYSE:JWN)
Number of Hedge Fund Holders as of Q2 2024: 34
Nordstrom, Inc. (NYSE:JWN) offers private-label merchandise for women, men, and children, with a primary focus on apparel, beauty, shoes, accessories, home goods, and more items.
The company has strong financials, delivering solid fiscal Q2 2024 results with net sales worth $3.8 billion. Its earnings per share came up to $0.96, with the company growing new sales along with comparable sales and expanded margins. Customers are responding positively to the newness of the company’s brands, and momentum in its digital business is continuing to grow, with net sales growth of 6%.
Fiscal Q2 2024 saw progress across three of Nordstrom, Inc.’s (NYSE:JWN) priorities, including optimization of its operations, banner growth, and momentum building across Nordstrom Rack. Driving Nordstrom’s banner growth is a key area of focus for the company. It is supporting it by offering a compelling selection of merchandise, along with exceptional customer experience and service. The company is striving to offer a more consistent brand offering across its stores, ensuring that it has relevance, newness, and depth of merchandise.
6. Dollar Tree, Inc. (NASDAQ:DLTR)
Number of Hedge Fund Holders as of Q2 2024: 38
Dollar Tree Inc. (NASDAQ:DLTR) sells a variety of merchandise, ranging from snacks, food, and decor to automotive, electronics, glassware, toys, and much more. It operates more than 15,000 stores in the US and Canada, supported by a nationwide logistics network comprising 24 distribution centers. The company offers exceptionally discounted merchandise in convenient neighborhood stores, contributing to its popularity among consumers.
Dollar Tree (NASDAQ:DLTR) dealt with interest rates, inflation, and other macro pressures at the beginning of fiscal Q2 2024, which affected consumer buying behavior across the company. However, despite these near-term pressures, it is confident in its ability to compete and win. The company is offering customers exceptional values aligning with the current environment. It boasts a differentiated business model and a long-term growth strategy of multi-price expansion and store growth acceleration, two factors that give it a competitive edge.
Dollar Tree (NASDAQ:DLTR) is furthering its growth strategy by reopening around 85 former 99 Cents Only locations as Dollar Trees. It plans to reopen more than 50 remaining locations by the end of the year. These 99 Cents Only locations are high-quality, proven stores located in strong markets and have significant growth potential. They mark the company’s expansion across California and the Southwest and are attaining significant positive approval from its customer base.
Here is what Madison Investors Fund stated regarding Dollar Tree, Inc. (NASDAQ:DLTR) in its Q2 2024 investor letter:
“Dollar Tree, Inc. (NASDAQ:DLTR) underperformed following a plethora of concerns: weakness surrounding the low-end consumer, pricing actions by peers, and disappointing sales at the core Dollar Tree banner. In addition, the significant news that management has placed the struggling Family Dollar banner under strategic review was received skeptically by investors. Despite these concerns, we are encouraged by the long-term prospects of the multi-price initiatives at the Dollar Tree banner and are entirely supportive of management’s effort to enhance value by evaluating alternatives for Family Dollar. We also see a comfortable margin of safety in the shares at the current price.”
5. Dollar General Corporation (NYSE:DG)
Number of Hedge Fund Holders as of Q2 2024: 42
Dollar General Corp (NYSE:DG) is an American retailer with a chain of stores across Mexico and the US. It offers a range of discounted merchandise, consumable products, and non-consumable items such as seasonable merchandise. The company operates around 20,000 stores and plans to open more than 800 stores across the US. It also announced plans to remodel around 1,500 locations and relocate 85 stores in 2024.
It is making significant progress on its back-to-basic plans, with net sales increasing by 4.2% to $10.2 billion in fiscal second quarter of 2024 compared to net sales of $9.8 billion in fiscal second quarter of 2023. Dollar General Corp’s (NYSE:DG) top priority is to improve its on-time and in-full truck delivery rates, which it refers to as OTIF. The company’s focused efforts have led to significantly higher OTIF levels compared to last year, with improvements in both fresh and traditional supply chains.
It has also made significant progress in optimizing its distribution capacity. It is closing the less efficient temporary facilities, and building and opening two new permanent distribution centers in Colorado and Arkansas. The company expects to ramp up operations in the coming months, positively contributing to reduced transportation costs and a reduction in stem miles over time.
Dollar General Corp (NYSE:DG) is also undertaking the first full-scale refresh of its sorting process within its distribution centers since the launch of its Fast Track initiative in 2017. The ultimate goal of this initiative is to enable its store teams to stock shelves quickly, driving greater on-shelf availability for its customers and boosting ongoing sales growth. It has made significant progress on this front, and is on track to complete it by the end of the year.
Artisan Value Fund stated the following regarding Dollar General Corporation (NYSE:DG) in its fourth quarter 2023 investor letter:
“Our biggest full-year detractors included energy holdings Schlumberger and EOG and 2023 purchases Baxter International and Dollar General Corporation (NYSE:DG). Dollar General, a discount retail chain in the US, has dealt with a few struggles. The retailer had previously benefited from COVID stimulus checks, reflected in the bump it experienced in revenues and margins.
However, the effects have worn off, and its core consumer has been hurt by inflation, stiffer economic conditions, lower tax refunds and reduced SNAP benefits. Margins are also under pressure due to labor costs, shrink and markdowns. Some of the issues are likely self-inflicted. After years of focusing on store growth to drive the top line, store standards have suffered. Addressing store standards is needed to turn around flagging traffic, comps and customer satisfaction. On the positive side, discount retail due to its trade-down feature tends to be a defensive business during economic slowdowns.
Dollar General has a strong market position and faces less competition than other discounters due to its largely rural footprint. The business’s value proposition is everyday low prices, a convenient format, and proximity. The company has leverage due to capital expenditures, but interest coverage of ~9X is strong. From a valuation perspective, the froth from the pandemic, when it traded in the low- to mid-twenties, is gone. So, we aren’t paying for margin upside or store growth. Those would be bonuses. If the company can continue to grow revenues, generate cash flow, and buy back stock, we still see a path to success.”
4. Macy’s, Inc. (NYSE:M)
Number of Hedge Fund Holders as of Q2 2024: 44
Macy’s, Inc. (NYSE:M) is an omnichannel retail company that operates stores, websites, and mobile applications under three brands: Macy’s, Bloomingdale’s, and Bluemercury. These brands sell a range of merchandise, including apparel, accessories, home furnishings, cosmetics, and other consumer goods. Macy’s (NYSE:M) operates stores in 43 states, Guam, the District of Columbia, and Puerto Rico.
Its fiscal second quarter 2024 results show meaningful progress across the company’s Bold New Chapter strategy. It experienced ongoing strength in fragrances and green shoots in women’s ready-to-wear apparel, including brands like Steve Madden, Donna Karan, Avec Les Filles, and others. Consumers also responded positively to the company’s ongoing private brand ready-wear reimagination, including improved quality and elevated fashion.
The breadth of merchandise offered at the company’s nameplates Bluemercury and Bloomingdale’s across aspirational to luxury price points is continually resonating with its audience, delivering strong gross margin expansion and better-than-expected SG&A as it continues to fund its growth investments.
Macy’s (NYSE:M) realizes that locations have diverse socioeconomic and geographical representation and thus has initiatives that are cross-functional. With two consecutive quarters of meaningful comp outperformance, it is now implementing women’s shoe and handbag staffing tests in around 100 additional go-forward locations. These tests are expected to provide valuable insights, helping improve and refine the company’s initiatives. It takes the fourth spot on our list.
3. Target Corporation (NYSE:TGT)
Number of Hedge Fund Holders as of Q2 2024: 52
Target (NYSE:TGT) is an American retail corporation that operates a chain of discount department stores and hypermarkets selling a wide assortment of goods, ranging from clothing and groceries to electronics, sports, entertainment, and other general merchandise. It boasts around 2,000 stores across the United States and plans to open more than 300 stores in the coming decade.
Target (NYSE:TGT) is running on solid fundamentals, with its fiscal second quarter of 2024 earnings showing comparable sales growth of 2%, at the very top end of its guidance range. Its EPS of $2.57 was also well above the high end of its guidance, reflecting more than 42% growth over last year. This growth was driven entirely by traffic, reflecting the combined benefits of the multiple guest-focused initiatives the company outlined in its Financial Community Meeting.
The company’s digital channels and stores both grew in fiscal Q2 of 2024, with high single-digital growth in its digital comps. Its same-day services, led by Target Circle 360 and Drive Up, saw even faster growth, with both growing in the low teens.
After its relaunch in fiscal Q1 2024, the company is seeing continued momentum in its Target Circle loyalty platform. With more than 100 million members, it added more than 2 million new members in fiscal Q2 2024. The company’s aspirations for this platform grow beyond its membership base, as it has redesigned Target Circle with the goal of boosting engagement among existing members. The company boasts a strong market presence, which gives it a significant competitive edge. It ranks third on our list of the 7 best department store stocks to buy according to hedge funds.
Carillon Eagle Growth & Income Fund stated the following regarding Target Corporation (NYSE:TGT) in its Q2 2024 investor letter:
“Target Corporation’s (NYSE:TGT) sales continue to feel the consumer softness in discretionary goods. In addition, while margins are recovering, they are not up to expectations. Encouragingly, sales are sequentially increasing and comparable sales are expected to get easier as Target enters the back half of the year.”
2. Costco Wholesale Corporation (NASDAQ:COST)
Number of Hedge Fund Holders as of Q2 2024: 71
Costco Wholesale Corporation (NASDAQ:COST) operates a vast network of membership warehouses and e-commerce websites. It offers customers exclusive member services and convenience options through a wide selection of merchandise sold in its specialty departments. Its offerings range from warehouse ancillary and food to pharmacy, tire installation, food court, and other business offerings. Costco (NASDAQ:COST) operates through three segments: United States Operations, Canadian Operations, and Other International Operations. It has stores in several countries across the globe, including Taiwan, Korea, Sweden, and more.
The company hit its target of opening 30 new warehouse locations in fiscal 2024, which included one relocation and resulted in a total of 29 net buildings. It is also seeing significant opportunities across the globe, with its fiscal 2025 plan holding 12 of its planned 29 openings coming from outside of the US. The company expects to add 26 net new buildings in fiscal 2025.
It is also continually growing its e-commerce business, with Costco Logistics reporting a remarkable year. Improvements in the company’s assortments, scheduling functionality, and delivery times all contributed towards an improved member experience.
Costco’s (NASDAQ:COST) reported net income improved 9% year over year in fiscal Q4 2024, primarily due to such positive improvements. Net sales for fiscal Q4 2024 were $78.2 billion, undergoing a 1% increase from fiscal Q4 2023’s $77.4 billion. The company has found success in working with suppliers to localize the production of bulky items. These include laundry detergents, paper, and water. It is thus significantly reducing both the costs and emissions associated with shipment by manufacturing these goods closer to the countries they are sold in.
Since Costco (NASDAQ:COST) no longer has to ship millions of units of paper towels from the US to Asia, reduced freight has allowed the company to reduce the price by around 30%, or $8 per unit, in that market. With production ramping up, it is in the process of transitioning its other Asian markets to locally produce skews. This shift in production of paper towels will result in annual member savings of $30 million for the company.
1. Walmart, Inc. (NYSE:WMT)
Number of Hedge Fund Holders as of Q2 2024: 95
Walmart, Inc. (NYSE:WMT) is a multinational, omnichannel retailer that operates a chain of discount department stores, grocery stores, and hypermarkets in the United States and 23 countries. Apart from retail and wholesale stores and clubs, it also operates e-commerce websites and mobile applications. Its operations are divided into three segments: Walmart International, Walmart US, and Sam’s Club. It has over 10,500 stores worldwide and employed around 2.1 million associates globally at the end of FY2024. 1.6 million of these associates were concentrated in the US.
Walmart’s (NYSE:WMT) widespread presence, wide assortment of items, and convenience give it a competitive advantage in the industry. Customers have a lot to choose from and a large number of stores to go to. Its store and club businesses are growing, with pickup growing faster than both domains. Walmart (NYSE:WMT) is improving its speed and delivery accuracy, giving more options to customers through e-commerce progress. Its earnings for fiscal second quarter of 2025 show a 23% global membership income growth, with Sam’s Club US achieving a record high membership count. Advertising sales driven by marketplace sellers also grew by nearly 50%, all showing a strengthening in the company’s business for the future.
Walmart (NYSE:WMT) is experiencing a strong consumer overall. Its fiscal Q2 2025 results show increasing market share with higher unit volume and transaction counts across the US. The company’s food, health, general merchandise, and wellness sectors are improving. It claims that since consumers across all income levels look for one thing, value, its US marketplace sales grew by 32% for the quarter by resonating with consumers.
Walmart (NYSE:WMT) is finding tangible ways to employ generative AI to improve member, customer, and associate experience. It is leveraging large language models and data from others to build its own. For instance, the company has used generative AI to improve its product catalog. It has also introduced an AI-powered search on its app and site, offering customers more help through its new shopping assistant that provides ideas and advice.
Overall, WMT ranks first among the 7 best department store stocks to buy according to hedge funds. While we acknowledge the potential of cleaning materials stocks, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than WMT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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