We recently compiled a list of the 7 Best Department Store Stocks to Buy According to Hedge Funds. In this article, we are going to take a look at where Costco Wholesale Corporation (NASDAQ:COST) stands against the other department store stocks.
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”.
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).
A customer in a warehouse aisles, browsing the wide range of branded and private-label products.
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.
Overall COST ranks 2nd on our list of the best department store stocks to buy according to hedge funds. While we acknowledge the potential 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 COST but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article is originally published at Insider Monkey.
