Discount stores include retailers that sell apparel, footwear, groceries, accessories and more at low prices. They operate through digital channels and physical stores. While  online channels did well during the pandemic, physical stores took a hit. With the economy’s reopening and the ongoing COVID-19 inoculation drive,  discount stores could receive a new lease on life because the relaxation of social distancing norms might motivate more shoppers to return to physical stores.

However, a trend change may be afoot. The recent $1.9 billion American Rescue Plan and an improving job market–both of which imply an increase in consumers’ disposal income–could lead  shoppers to spend more at traditional stores at the expense of discount retailers. Thus, discount stores in the United States are could see mixed results in the near term.

However, current market uncertainty suggests that discount retail stocks could be the safer bet. The demand for daily consumption goods is relatively inelastic and, as such, discount store stocks should offer a decent cushion in an investment portfolio.

Nevertheless, investors must be judicious in picking discount store stocks. We believe two stocks from this segment, Dollar Tree, Inc. (DLTR), and Dollar General Corporation (DG), are good picks. But we think investors should avoid the stocks of Five Below, Inc. (FIVE), and Ollie’s Bargain Outlet Holdings, Inc. (OLLI).

Click here to checkout our Retail Industry Report for 2021

Two stocks to buy:

Dollar Tree, Inc. (DLTR)

DLT operates discount variety retail stores through its two segments, Dollar Tree and Family Dollar. It provides consumable merchandise, health, beauty care,  household paper and chemicals, and frozen and refrigerated food, and a variety of other groceries. The Dollar Tree segment sells merchandise at the fixed price of $1.00.

During the fourth quarter, ended January 31, 2021, its net sales grew 7.2% year-over-year to $6.8 billion. The same store sales of its  Family Dollar brand rose 8.1% during the quarter. Its EPS for the quarter surged 310% year-over-year to $2.13.

DLTR  introduced the Combination Store Concept, which is a blend of both its brand, Dollar Tree and Family Dollar, to gain a foothold in smaller markets. The company aims to open 600 new stores and to renovate 1,250 Family Dollar stores in its fiscal year 2021. The new stores are likely to consist of 400 Dollar Tree stores and 200 Family Dollar stores.

Analysts expect DLTR’s revenue for its fiscal year ending April 30, 2021 to be $6.8 billion, representing a 3.7% year-over-year decline. Its EPS for the quarter is expected to surge 29.8% to $1.35.

DLTR has risen  42.6% over the past year to close yesterday’s trading session at $107.70. Over the past six months, the stock gained 23.2%.

It’s no surprise that DLTR  has an overall B rating,  which equates to Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

DLTR has a B grade for Value. Stability and Quality. In the A-rated, 40-stock Grocery/Big Box Retailers industry, it is ranked #12.

In addition to the POWR Rating grades I’ve just highlighted, one  can see the DLTR ratings for Growth, Sentiment, and Momentum.

Dollar General Corporation (DG)

DG is a discount retailer that provides various merchandise products in the Southern, Southwestern, Midwestern, and Eastern United States. Consumable products, including paper and cleaning products, such as paper towels, bath tissues, paper dinnerware, trash and storage bags are some of the products sold by  DG.

DG’s revenue during the third quarter ended October 31, 2021 climbed 17.3% year-over-year to $8.1 billion. Its EPS for the quarter rose to $2.31 from $1.42 in the same period last year. During the quarter, DG rolled out DG Pickup across nearly its entire store base, and then launched its newest store format, Popshelf.

Analysts expect DG’s revenue for the quarter ending January 31, 2021, to be $8.3 billion, representing a 16% year-over-year rise. Its same store sales for the quarter rose 12.2%, driven by an increase in average transaction amount, partially offset by a decline  in customer traffic. Its EPS is expected to grow at the rate of 17.3% per annum over the next five years.

DG ended yesterday’s trading session at $187.51, rallying 25.3% over the past year. During the past six months, DG declined 4.9%.

Due to its bright prospects, DG has an overall B rating, which translates to a Buy in our POWR Rating system. DG has a Value, Sentiment, and Quality Grade of B. Among Grocery/Big Box Retailers stocks, it’s ranked #14.

Click here to see the additional POWR Ratings for DG (Stability, Growth, and Momentum).

Two stocks to avoid: 

Five Below, Inc. (FIVE)

FIVE is a specialty value retailer in the United States that sells merchandise that includes accessories, novelty socks, scarves, gloves, hair accessories, sunglasses, jewelry, athletic tops and bottoms, and T-shirts. The company also offers sports equipment, team sports merchandise and fitness accessories, such as hand weights, jump ropes, and gym balls and games.

During its fiscal fourth quarter, ended January 31, 2021, Five’s revenue rose 24.9% year-over-year to $858.5 million. Its comparable sales increased by 13.8%. The company launched two new stores and at the end of the quarter it had 1,020 stores in 38 states. This denotes a 13.3% increase in stores from the prior year period. Its EPS for the quarter climbed to $2.20 from $1.97 posted in the same period last year.

Analysts expect FIVE’s revenue for the quarter ended April 30, 2021 to be $448.25 million, representing a 94.6% increase year-over-year. Its EPS is likely to grow at the rate of 16% per annum over the next five years.

FIVE ended yesterday’s trading session at $196.01, surging 201.3% over the past year. During the past six months, FIVE climbed 44.2%. FIVE now has a stretched valuation . Its p/e of 91.68x is much higher than the industry average  20.46x.

FIVE’s POWR Ratings are consistent with this bleak outlook. The stock has a D grade for Value and Stability. It is ranked #31 of 38 stocks in the B-rated Specialty Retailers industry.

Click here to see the additional POWR Ratings for FIVE (Momentum, Growth, and Sentiment, Quality).

Ollie’s Bargain Outlet Holdings, Inc. (OLLI)

OLLI operates as a retailer of  food products, housewares, books and stationery, health and beauty products, bed and bath products, electronics and toys, floor coverings, and other products. Ollie’s Bargain Outlet, Ollie’s Army, Good Stuff Cheap Real Brands Real Cheap!, Real Bargains, Real Brands! are the brands  OLLI sells.

During the quarter ended October 31, 2020, OLLI’s total sales rose 26.7% year-over-year to $414.4 million. Its comparable store sales for the quarter rose 15.3%. OLLI inaugurated 19 new stores and ended the quarter with 385 stores in 25 states, representing  a year-over-year increase in store count of 11.6%. Its EPS for the quarter climbed 58.5% year-over-year to $0.65.

Analysts expect OLLI’s revenue for the quarter ended January 31, 2021 to be $488.4 million, representing  a 15.6% increase year-over-year. Its EPS is likely to decline at the rate of 17.7% per annum over the next five years.

Over the past year, OLLI has advanced  121.1% to end yesterday’s trading session at $90.23. During the past six months, the stock has climbed 7.7%. However, the stock is overvalued; its  forward ev/ebitda  of  20.28x compares poorly to the industry average 12.73x.

OLLI’s dismal prospects are also apparent in its POWR Ratings. The stock has a D grade for Stability and Sentiment. It is ranked #28 of 38 in the B-rated Specialty Retailers industry.

Click here to see the additional POWR Ratings for OLLI (Momentum, Growth, Value, and Quality).

The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Click here to checkout our Retail Industry Report for 2021

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DLTR shares were trading at $106.49 per share on Thursday afternoon, down $1.21 (-1.13%). Year-to-date, DLTR has declined -1.43%, versus a 5.92% rise in the benchmark S&P 500 index during the same period.

About the Author: Namrata Sen Chanda

Namrata is an accomplished financial journalist, with nearly a decade of experience. She specializes in interpreting news releases and framing investment strategies, and has worked with some of the leading companies in real estate, banking, insurance, mutual funds, financial research, fintech, and investment education. More...

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