We recently compiled a list of the 10 Best Discount Retailer Stocks to Buy. In this article, we will look at where Ross Stores, Inc. (ROST) 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
Ross Stores, Inc. (NASDAQ:ROST)
Number of Hedge Fund Holders: 53
Ross Stores Inc. (NASDAQ:ROST) is a home fashion and off-price apparel chain in the US that offers name-brand and designer in-season apparel, footwear, accessories, and home fashion for a broad audience. It provides around 20% to 60% discounts on its prices as compared to regular department and specialty stores, solidifying its market presence and appealing to its audience. The company operates around 1,764 locations in 43 states across the US, Guam, and the District of Columbia.
The company also operates around 345 dd’s DISCOUNTS® stores in 22 states in the US, which offer even more discounted name-brand, in-season apparel, footwear, accessories, and home decor with around 20% to 70% off. All Ross stores are family-friendly, with items for every age group. The total count of Ross stores and dd’s DISCOUNTS® stores comes up to more than 2,109. It announced the opening of 21 Ross stores and three dd’s DISCOUNTS® stores across 17 states in the US in June and July. This expansion is a part of the company’s plans to open around 90 new stores in fiscal 2024, divided into 75 Ross and 15 dd’s DISCOUNTS® stores.
The company’s sales increased for the 2024 year-to-date period, going from $9.4 billion in 2023 to $10.1 billion in 2024. Comparable store sales also grew by 4% in Q2 2024, primarily because of increased basket size and improved traffic. Apart from rising sales, Ross’s improved profitability also benefited from lower incentive and distribution costs, which were partially offset as designed by lower merchandise margins. Ross Stores Inc. (NASDAQ:ROST) is taking steps to continue these improving trends by adjusting its assortments in its newer markets to resonate with a wider customer base. At the end of Q2 2024, the company’s total consolidated inventories rose 8% as compared to last year.
The company’s solid and profitable model is appealing to investors. Ross Stores Inc. (NASDAQ:ROST) also raised its guidance assumptions for Q3, with total sales forecasted to increase 3% to 5% compared to 2023. It also has plans to open 47 new stores in Q3, including 43 Ross and 4 dd’s DISCOUNTS® stores. Ross Stores Inc. (NASDAQ:ROST) holds a consensus Buy rating among analysts, with its median price target of $150.79 implying an upside of 16.06% from current levels. Morgan Stanley reaffirmed their Buy rating on the stock on September 4. 53 hedge funds hold stakes in the stock as of Q2 2024, with D E Shaw holding the largest stake worth $420.48 million.
TimesSquare Capital U.S. Mid Cap Growth Strategy stated the following regarding Ross Stores, Inc. (NASDAQ:ROST) in its fourth quarter 2023 investor letter:
“In Consumer-oriented sectors, we lean towards value-oriented or specialty retailers, franchise models, as well as premium brands. Also gaining 23% over the quarter was Ross Stores, Inc. (NASDAQ:ROST), an off-price retailer featuring apparel and home fashions. Third quarter results were solid as sales comparisons accelerated with higher levels of customer traffic across geographies. Management raised full-year guidance. We added to the position given our increased conviction at the start of the quarter.”
Overall, ROST ranks 3rd on our list of the best department store and discount retailer stocks to buy. While we acknowledge the potential of ROST 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.