When Donald Trump announced tariffs on China, Canada, and Mexico, stocks of most of the retail stores went down. The tariffs are likely to increase inflation and hurt the country’s economy if they continue for the duration of Trump’s term.
For investors, it is vital to keep an eye on companies that are either taking a hit on revenue directly through tariffs or losing popularity among consumers in the foreign countries involved. Some companies can take a financial hit better than others. Take for instance a company that makes branded clothing. Such a company can raise the prices of its products and its loyal consumers won’t mind. Now imagine a retail store that sells the same product. When consumers see a 10% rise in the price of the product, they blame the store, not the brand. It is the retail store that loses value in this case and that’s why the tariffs hurt them, even if they aren’t directly exposed to China.
We decided to take a look at 8 discount stores as investments in 2025. To come up with our list of 8 discount stores as investments in 2025, we only considered stocks with a market cap of at least $2 billion.
8. BJ’s Wholesale Club Holdings Inc. (NYSE:BJ)
BJ’s Wholesale Club Holdings Inc. manages a membership-based warehouse club chain that offers a wide range of products including general merchandise, groceries, gasoline, and other services. It sells its products through mobile apps and websites, BerkleyJensen.com, BJs.com, and Wellsleyfarms.com.
The company’s stock is trading at all-time highs. The Q3 results showed a 3.7% revenue surge with expanding margins, resulting in an 18% YoY increase in profitability. The strong performance in the first three quarters has meant that the full fiscal 2024 growth targets are now between 2.5% to 3% compared to the previous 1% to 2%. It is this exceptional performance that has seen the stock gain 60% in a year.
On top of the financial performance, the company continues to reward shareholders with buybacks. In November, the company authorized a $1 billion buyback, which was 10% of its market cap at that time. No wonder the stock’s trading at all-time highs. Even the threat of tariffs and inflation hasn’t dented the stock price!
7. Costco Wholesale Corporation (NASDAQ:COST)
Costco Wholesale Corporation operates a membership warehouse club chain that provides private-label and branded products in various merchandise categories. The company offers electronics, hardware, sporting goods, health & beauty aids, and other products.
The stock is already up 13.82% this year and has more than doubled in a year and a half. A stock that has always been considered overvalued is now proving why that’s so. The company commands respect as a stable investment and the stock valuation reflects that.
If investors are waiting for a correction in the stock, they need to think again. After 7 straight sessions of gains, the stock continues to make new all-time highs. The hype isn’t without reason. On February 5th, the company announced its January comparable sales figures and they came in at 7.5%, way ahead of the Bloomberg estimates of 4.9%! If we exclude the negative impact of forex and higher gasoline prices, the figure is even more impressive at 9.8%.
Costco continues to attract significant institutional investment and with a solid business model with a high-margin recurring revenue, it continues to be a great investment for retail investors as well.
6. Dollar General Corporation (NYSE:DG)
Dollar General Corporation is a discount retailer that offers multiple merchandise products. The company provides cleaning products, laundry products, consumable products, and other products. The company’s stock has lost over 71% of its value in just 2 years. While this is disappointing for existing shareholders, there is an opportunity here for new investors. It is unlikely that people will stop shopping for cheaper products anytime soon. So DG’s turnaround simply depends on the management pulling off a turnaround.
Inflation in the last couple of years has reduced the disposable income of low-income families, a demographic that loves to shop at DG stores. The stock is trading at just over 11 times earnings which sounds like a really good bet. To determine if that makes it a good investment or a value trap, let’s take a look at what the management is planning.
The first thing the management has done is to stop buybacks. Clearly, the management is prioritizing efficient usage of cash and long-term benefits over short-term stock appreciation. There is a clear strategy for reducing shrinkage (inventory lost to theft, errors, etc.). There is a self-checkout limit of 5 items per self-checkout while in some locations the facility has been removed completely. Other initiatives include expanding private label selections, improving store layouts, and completely remodeling older locations.
Initiatives like the above are already showing results, but it is more about the management’s intention than results at this stage. If you’re willing to back the leadership team here, the rewards could be sweet down the road.
5. Dollar Tree Inc. (NASDAQ:DLTR)
Dollar Tree Inc. operates a chain of discount retail stores and offers a wide range of products including household, personal care, food, health, and other general merchandise. The company has two main business units; Family Dollar and Dollar Tree. It has a unique business model where merchandise is priced at a fixed rate of $1.25 in its dollar tree segment. A 45% decline in share price within a year suggests low-income households, the company’s primary target market, aren’t doing well with disposable income.
Dollar Tree continues to be dragged down by the struggling Family Dollar business. The acquisition that was signed just over 10 years ago is now a big headache for DLTR. At that time, Family Dollar was a much bigger network than Dollar Tree’s own stores. We now see that the company was unable to handle this increasing demand from a management perspective. To make matters worse, further expansion ended up hurting the existing stores.
The company will have to learn how to survive in the tough macroeconomic environment rather than relying on government programs for low-income households or improving macro. Unlike Dollar General (DG), which is also facing similar struggles, DLTR’s management doesn’t inspire a lot of confidence among investors. There’s a certain risk associated with this investment, and the reward isn’t very attractive.
4. Ollie’s Bargain Outlet Holdings Inc. (NASDAQ:OLLI)
Ollie’s Bargain Outlet Holdings Inc. is a discount retailer of well-known brand-name products in the US. It provides electronics, clothing, garden products, housewares, health & beauty aids, and other products. The company appointed a new CEO earlier this week and he has his work cut out with the stock up over 43% in a year.
Just last month, OLLI was added to JP Morgan’s Analyst Focus List. The research firm believes the retailer is at an inflection point supported by consistent same-store sales growth going forward. As a result, the market is willing to give a premium valuation to the stock.
The company continues to run on solid fundamentals with growth driven by new store openings and Big Lots real estate acquisitions. In the last few months, OLLI has been able to reduce its supply chain costs and as a result, boost its gross profit margins. The improving cash position as a result is also helping the company boost its interest income.
Here’s the only thing investors need to be careful about. Mid-cap stocks like OLLI that command a premium valuation tend to fall badly on an earnings miss. If you’re planning to invest in the company, keeping some powder dry may be a good idea.
3. PriceSmart Inc. (NASDAQ:PSMT)
PriceSmart Inc. runs and manages a chain of US-style membership warehouse clubs. It offers private label and basic non-consumable and consumable products. The company provides groceries, electronics, seafood, produce, sporting goods, home furnishing products, and other products. Even though the stock gained 20% over the course of a year, there was considerable volatility along the way. This makes hunting the stock on dips an interesting exercise at these valuations for investors.
PriceSmart is often dubbed the Costco of Central America. It has loyal customers that total 1.9 million, healthy foot traffic across its stores and is spread across the continent, though most of its stores are in Colombia, Costa Rica, and Panama.
The company has healthy gross margins of around 17%, which are made even more attractive by a membership model that allows the company to receive predictable, consistent, and recurring revenue. The quality of the management can be judged by the fact that its operations require low working capital and are well-supported by healthy cash flows. The company is a buy for anyone looking for Central America exposure while local stores in the US struggle to deal with Donald Trump’s new policies.
2. Target Corporation (NYSE:TGT)
Target Corporation is a general merchandise retailer that provides jewelry, apparel, shoes, beauty & personal care, pet supplies, and other products. The company supplies its products through digital channels and its stores. The stock is down nearly 4% in the last five trading days.
Target shareholders were caught by surprise in the third quarter when the company missed analyst estimates, a rare occurrence for the retail giant. The stock crashed over 22% as a result. The main reason for the poor performance was lower consumer spending which was further exacerbated by weakening gross margins. The stock has been slowly recovering since then, anticipating the holiday season results which usually come in good for the company.
The firm is expected to receive a significant boost when it announces the Q4 result in early March. Already released numbers show the company exceeded sales expectations, with record sales on Cyber Monday and Black Friday. The earnings will confirm if the people were indeed spending money, unlike Q3. Chances are they were and that’s why the stock is inching up slowly.
Target is a strong company and due to its recent struggles is trading at just over 14 times forward earnings while the median forward PE for the sector is 18.39. There is value to be had here as people try to get in to play the December quarter earnings.
1. Walmart Inc. (NYSE:WMT)
Walmart Inc. operates wholesale, retail, and e-commerce businesses throughout the world. It has three main business units; Walmart International, Walmart U.S., and Sam’s Club. An 81% performance in the last year has meant that investors continue to fear high valuations. The stock is trading at all-time highs and even tariffs couldn’t negatively impact the stock.
There is a good chance that most of Walmart’s non-grocery items are sourced from China. Investors consider the company strong enough to withstand the tariffs either by passing the cost on to consumers or by absorbing it. In both cases, there is a short-term and long-term negative impact. It is what it is.
On the other hand, most of the optimism surrounding Walmart stems from its innovation. The company is building 150 new stores that it dubs ‘Store of the Future’. One of the initiatives includes providing EV fast charging in its parking lots. On the e-commerce front, the use of AI to create personalized shopping experiences will likely help them increase the amount of spending per consumer when on its platform.
The company’s media business Walmart Connect is also growing consistently, up 26% in the third quarter. All these developments mean investors are looking at the advantages of these innovations rather than the impact of tariffs.
Walmart Inc. is not on our latest list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 88 hedge fund portfolios held WMT at the end of the third quarter which was 95 in the previous quarter. While we acknowledge the potential of WMT as a leading AI investment, our conviction lies in the belief that some 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 as promising as WMT 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 was originally published at Insider Monkey.
