Cases of COVID-19 infections are on the rise again. European countries were the first to bear the brunt as countries like Netherlands and Austria imposed lockdowns. Meanwhile, in South Africa, reports of a new variant made headlines because it was believed to be more transmissible and infectious than the Delta variant. The WHO named the new variant, omicron, a variant of concern on November 26, 2021.

The omicron variant has been detected in more than 89 countries. And according to the WHO, cases are doubling every 1.5 to 3 days with community transmission. A minor breakthrough has been made in gauging the severity of the variant. But it is still unclear whether current vaccines are entirely effective against it. The WHO has warned that with cases rising so rapidly, hospitals may soon be overwhelmed in some places. Although President Joe Biden made it clear that full lockdowns are out of the question, the fear of partial restrictions remains.

As omicron variant cases surge, it could lead to lower foot traffic at brick-and-mortar retail stores. So, we think it could be wise to avoid brick-and-mortar retail stocks Dollar General Corporation (DG), Tractor Supply Company (TSCO), and Five Below, Inc. (FIVE). They also look overvalued at their current price levels.

Dollar General Corporation (DG)

DG is a Goodlettsville, Tenn.-based discount retailer that offers consumer items, seasonal items, home products, and apparel. The company’s merchandise includes brands from manufacturers and its private brand selections. Under various categories, it offers products that include packaged food, snacks, health and beauty, and everyday apparel for infants, toddlers, men, and women.

On December 2, 2021, DG forecasted that its annual sales and profit would be below expectations because it faces rising freight costs, shipping delays, and supply chain bottlenecks. This comes as a double whammy for DG because it was already battling high labor costs and increasing raw materials prices.

DG’s selling, general and administrative expenses for its fiscal third quarter, ended October 29, 2021, increased 8.8% year-over-year to $1.95 billion. The company’s net income decreased 15.1% year-over-year to $487.03 million, and its EPS came in at $2.08, down 10% year-over-year.

In terms of forward EV/S and P/S, DG’s respective 1.89x and 1.50x are higher than the 1.37x and 1.16x industry averages. Furthermore, its 21.80x forward non-GAAP P/E  is 51.6% higher than the 14.37x industry average.

Analysts expect DG’s EPS for its fiscal 2022 to decrease 4.2% year-over-year to $10.17. Over the past month, the stock has declined 2.5% in price to close yesterday’s trading session at $220.22.

Tractor Supply Company (TSCO)

TSCO in Brentwood, Tenn., operates rural lifestyle retail stores in the U.S. The company is focused on supplying the needs of recreational farmers, ranchers, tradesmen, and small businesses. It operates under Tractor Supply Company, Del’s Feed & Farm Supply, and Petsense and sells its products on TractorSupply.com and Petsense.com.

For its fiscal third quarter, ended September 25, 2021, TSCO’s selling, general, and administrative expenses increased 13.3% year-over-year to $788.10 million. Its SG&A expenses, including depreciation and amortization, for the nine months ended September 25, 2021, increased 19.9% year-over-year to $2.34 billion. Also, its comparable-store sales came in at 13.1%, versus 26.8% in the year-ago period.

In terms of forward EV/S and P/S, TSCO’s respective 2.22x and 2.01x are higher than the 1.37x and 1.16x industry averages. Furthermore, its 299% forward P/B is 299% higher than the 3.32x industry average.

For the quarter ending March 31, 2022, analysts expect TSCO’s EPS and revenue to decrease 17.4% and 0.4%, respectively, year-over-year to $1.28 and $2.78 billion. The stock has retreated 3.2% in price over the past month to close yesterday’s trading session at $227.33.

Five Below, Inc. (FIVE)

FIVE is a specialty retailer that offers a range of merchandise for teens and tweens. The Philadelphia, Pa.-based company provides a range of brands and licensed merchandise across categories, such as style, room, sports, tech, create, party, candy, and now. Its product groups include leisure, fashion and home, and party and snack.

FIVE’s selling, general & administrative expenses for its fiscal third quarter, ended October 30, 2021, increased 26% year-over-year to $159.91 million. Its capital expenditure increased 42.8% from last year to $213.22 million. And its current liabilities increased 23.5% year-over-year to $613.60 million.

In terms of forward EV/EBIT and P/S, FIVE’s respective 29.19x and 3.65x are higher than the 13.09x and 1.16x industry averages. Moreover, its 10.37x forward P/B is 212.2% higher than the 3.32x industry average. Over the past month, the stock has declined 12.2% in price to close yesterday’s trading session at $189.94.

DG shares were unchanged in premarket trading Thursday. Year-to-date, DG has gained 5.53%, versus a 27.04% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...

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