The COVID-19-pandemic-led restrictions were a massive obstacle for  discount stores last year because supply chains and operations were disrupted. However, many discount retailers strengthened their online presence to benefit from the online buying trend. While online sales are already helping many discount retailers, increasing physical store sales with the reopening of the economy should help them thrive in the coming months.

Investors’ interest in the discount retail space is partly evident in the SPDR S&P Retail ETF’s (XRT) 137.8% gains over the past year compared to SPDR S&P 500 ETF Trust’s (SPY) 39.9% returns. As stores integrate data analytics into their management to streamline operations and enhance supply chain efficiency, it could lead to further growth in this space. According to Research and Markets, the global retail market is expected to grow at a 7% CAGR over the next four years.

Discount stores are expected to gain from the industry tailwinds because they offer a wide range of goods at  lower prices. So, we think it is wise to bet now on Costco Wholesale Corporation (COST) and Dollar Tree, Inc. (DLTR) because they are well positioned to generate significant returns in the near-term.

Click here to checkout our Retail Industry Report for 2021

Costco Wholesale Corporation (COST)

COST operates an international chain of membership warehouses and offers merchandise at substantially lower prices than are typically found at conventional wholesale or retail sources. Although  its warehouses are designed to help small- to medium-sized businesses reduce costs in purchasing for resale and for everyday business use, individuals also purchase goods there  for their personal needs.

The company’s net sales increased 14.7% year-over-year to $43.89 billion for its fiscal second quarter, ended February 14. Its operating income grew 5.8% year-over-year to $1.34 billion, while its net income increased 2.1% year-over-year to $951 million. The company’s EPS increased 1.9% year-over-year to $2.14.

Analysts expect COST’s EPS and revenue to increase 22.8% and 17.5%, respectively,  year-over-year to billion for the current quarter, ending May 31, 2021. The stock has gained 25.8% over the past year to close yesterday’s trading session at $383.58.

COST’s POWR Ratings reflect its  promising outlook. The company has an overall B rating, which translates to Buy in our proprietary ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

The stock has a B grade for Momentum also.  Within the A-rated Grocery/Big Box Retailers industry, COST is ranked #20 of 39 stocks. To see the additional POWR Ratings for COST (Growth, Value, Stability, Sentiment and Quality), click here.

Dollar Tree, Inc. (DLTR)

Discount variety retail stores operator DLTR operates through two segments: Dollar Tree and Family Dollar. The Dollar Tree segment offers merchandise at the fixed price of $1, and the company also offers exclusive merchandise through its online platform. It has more than 15,000 stores across the 48 contiguous states and five Canadian provinces.

On April 15, DLTR introduced its new retail media network—Chesapeake Media Group—which connects brands with shoppers in real time. Its Family Dollar brand also announced  partnerships with Swiftly and Aki Technologies to support the new digital platform. These moves could further increase the company’s consumer base.

DLTR’s net sales increased 7.2% year-over-year to $6.77 billion its  fiscal fourth quarter, ended January 30. Its operating income grew 173% year-over-year to $681.60 million, while its income before taxes increased 209% year-over-year to $647.40 million. The company’s EPS increased 310% year-over-year to $2.13.

For the about-to-be-reported quarter, ended April 30, analysts expect DLTR’s EPS to increase 32.7% year-over-year to $1.38. It surpassed the Street’s EPS estimates in each of the trailing four quarters. Its annual revenue is expected to be $27.61 billion in fiscal 2023, which represents a 5% year-over-year rise. The stock has surged 36.1% over the past year to close yesterday’s trading session at $108.37.

DLTR’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall A rating, which equates to Strong Buy in our proprietary rating system. It has a B grade for Value, Momentum, Stability and Quality.

We have also graded DLTR for Growth and Sentiment. Click here to access all DLTR’s ratings. DLTR is ranked #4 in the same industry.

Click here to checkout our Retail Industry Report for 2021

COST shares were trading at $382.57 per share on Friday afternoon, down $1.01 (-0.26%). Year-to-date, COST has gained 1.96%, versus a 11.57% rise in the benchmark S&P 500 index during the same period.

About the Author: Nimesh Jaiswal

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles. More...

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