We recently compiled a list of the 10 Best Discount Retailer Stocks to Buy. In this article, we will look at where Costco Wholesale Corporation (COST) stands against other discount retailer stocks to buy.
Overview of the Discount Retail Sector
With half a decade of geopolitical chaos, recession in Europe, and above-target inflation, the US economy has remained resilient. The primary reason behind this is the American consumer: their spending makes up around 70% of the country’s gross domestic product. However, recent calculations have been showing a decline in amount of money Americans are spending.
A recent survey by accounting firm KPMG corroborated this pattern, finding that while people were optimistic about their economic standing, they harbored doubts and skepticism about the direction the US economy is headed. The survey also found that nearly 65% of participants expected to do more discount shopping this year. Around 60% of this number made $200,000 or more. In addition, around 14% said that they were planning to use buy now, pay later services.
Brian Moynihan, CEO of Bank of America, said that he also noticed a slowing in purchase rates of his customers. Consumer payments grew by 3.5% since last year, down from a 10% growth from the year before. This included measurement through checks, credit cards, and ATM withdrawals.
The discount retail industry in the US thus holds a promising outlook. This positive outlook is fueled by technological advancements, changing consumer preferences, and strategic adjustments. Shoppers across the retail industry are prioritizing value over everything else, including cheap prices. This is why retailers like Dollar Tree Inc. are struggling, while business in stores like Target and Walmart is booming. A similar trend is also taking place in other industries, with companies like Applebee undergoing increasing sales while consumer sentiments about giants like McDonald’s are showing signs of waning.
The Consumer Goods and Retail Outlook 2024 report by Economic Intelligence forecasts global retail sales to grow by 6.7% in dollar terms in 2024. While 85% of these sales are expected to stem from brick-and-mortar stores, 2024 is expected to be the strongest growth year for offline retail after 2021. Inflation is also easing in 2024, but that does not seem to affect increasing consumer preference for lower prices, prioritization of basic life goods, and an unwillingness to pay hefty delivery fees. These factors are likely to drive consumers on a bargain-hunt to discount retailers.
The discount retail industry is one of the most resilient sectors in the face of economic unpredictability, strengthened by its ability to offer affordable services and goods. Product discount campaigns are emerging across the country, showing positive development trends and becoming some of the hottest topics in retail. Effective inventory management, better pricing, and operational initiatives are likely to boost sales in discount retail companies, provided they offer the one thing customers are increasingly looking for: value.
The US led the largest market for discount store retail across the globe in 2023, amassing $128 billion in sales. According to data reported by The Wall Street Journal, average consumer spending on grocery items at discount retailers increased 71% between October 2021 and June 2022. In addition, consumer patterns are also showing an increased inclination towards e-commerce, which is pushing companies to solidify their digital presence. Successful retailers are endeavoring to meet their customers both in-store and online, which is why 9 out of the top 10 e-commerce websites are run by retailers with brick-and-mortar stores.
Similar trends are appearing across the world, with discount stores rising to a prominent industry standing over the past years in the US, Europe, and Japan. Zhang Qiang, founder and CEO of Hitgoo, a discount retail chain, said that the next decade in China is likely to be marked by discount store expansion. Since the discount store model focuses on food and daily use merchandise, it can be successful in both the domestic and international market, presenting new opportunities.
Our Methodology
We used the Finviz stock screener to identify stocks in the discount retailers business. We then shortlisted the stocks that were the most widely held by hedge funds, as of Q2 2024. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them.
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).
10 Best Discount Retailer Stocks to Buy
Costco Wholesale Corporation (NASDAQ:COST)
Number of Hedge Fund Holders: 71
Costco (NASDAQ:COST) is a Washington-based multinational corporation that ranks second on our list of the 10 best discount retailer stocks to buy. It operates a chain of membership-only big-box warehouse retail stores, and currently has around 878 warehouses in the US. Costco (NASDAQ:COST) plans to open 28 new stores in 2024 across the globe, most of which are in the US. The company’s membership model offers exceptional prices to its customers, giving it a distinct competitive advantage in the industry. Its membership fee income reached $1.122 billion in Q3 fiscal 2024, undergoing an increase of 7.6% year-over-year. Membership renewal rates stood at 93% across the US and Canada and 90.5% globally, highlighting continued consumer confidence in the company.
Costco’s (NASDAQ:COST) investments in improving its e-commerce platform and expanding its store network are proving to be primary drivers of revenue growth. It reported an increase in net income for its Q3 of fiscal 2024, going from $1.3 billion in Q3 2023 to $1.68 billion in Q3 2024. The company’s net sales also increased in the same period, growing 9.1% from $52.6 billion in Q3 2023 to $57.39 billion in Q4 2024.
Costco’s (NASDAQ:COST) strong stock performance has boosted investor confidence, with positive anticipation for its Q4 2024 earnings report. Apart from strong analyst expectations regarding increased revenue and EPS, Costco’s effective cost management and strong brand loyalty make it stand out as a reliable investment with much growth potential.
Costco (NASDAQ:COST) sports a consensus Buy rating among analysts, with its median price target of $892 implying an upside of 4.88% from current levels. Mad Money host and former hedge fund manager Jim Cramer described the company as the second-largest pure-play retailer in the country, saying the following:
“Costco is like no other. It’s the second-biggest pure-play retailer in the country, and it functions basically as a gigantic buying group for its members who order pretty much everything. The membership gets you amazing prices, including some that are likely below what the store itself pays, like the bottles of wine I mentioned the other day and the gold bullion everyone is so crazy about.
Costco is a one-of-a-kind retailer where you might not find everything, but what you do find is likely cheaper than anywhere else. This store has done the most to roll back prices in this nation, often through its premium house brand, Kirkland Signature. Costco isn’t afraid to go after any nationally branded product if it won’t lower prices, and under the Kirkland label, they get prices down because the Kirkland brand is better than most of the branded stuff.”
Overall, COST ranks 2nd on our list of the best department store and discount retailer stocks to buy. While we acknowledge the potential of COST as an investment, 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 DG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
