Big Box Buys: Six Favorite Discount Store Stocks

The pandemic has presented many challenges to retail outlets over the past year. But with home delivery, curbside pickup, and adjustments made for in-store shoppers, many retailers have been outperforming expectations. From dollar stores to membership clubs, several top investment experts and MoneyShow.com contributors highlight their favorite ideas among big box retailers and discount stores. John Buckingham, Prudent Speculator General merchandise discount store chain Target announced that it earned $2.67 in the fourth quarter, a company record as sales grew 20.5% to $28 billion. Results were higher than the $2.49 estimate. The size of the average ticket jumped 13.1% while same-day and digital sales respectively grew 212% and 118% year over year. Despite the strong results, shares slid 6% over the past week as sales growth decelerated for a second straight quarter, after many raced to stock their homes and pantries with essential items in the second quarter of 2020. We appreciate how Target's investments in recent years allow the company to use its proximity, with nearly 1,900 stores within 10 miles of the vast majority of U.S. consumers, to elevate the convenience it is able to offer. While we don't expect the top-line growth experienced throughout the pandemic to persist, we like Target's position to benefit from discretionary purchases as the economy continues to open. Management has resumed share repurchase activity, while it anticipates another dividend increase later this year. For now, the yield is around 1.6% and our target price stands at $219. Department store chain Kohl's announced it earned $2.22 in the fourth quarter on $5.9 billion of sales. The bottom-line result was vastly better than the $0.98 analysts had expected, while sales were roughly in line. Management credited at least 2 million new unique customers (a third of which are Millennials) shopping at Kohl's as a result of the Amazon Returns program. The company will be resuming its capital allocation strategy in 2021, which includes increasing capital expenditures, reinstating the dividend ($0.25 per share per quarter), resuming share repurchases of $200 million to $300 million, and employing liability management strategies. Management now expects sales to increase in the mid-teens percentage range with EPS in the range of $2.45 to $2.95 for all of 2021. We are delighted to see the retailer return to EPS growth in the quarter. We think management is moving in a solid direction to improve inventory, grow the digital channel, control costs and strike contracts with solid brands like Sephora and Calvin Klein. We continue to like that Kohl's boasts one of the strongest balance sheets of its peer group and look forward to once again collecting a dividend. In view of the recent agitation from a group of activist shareholders, our thinking is that management is doing a fine job and we believe the latest numbers, outlook and commentary illustrate the point. We've lifted our target price for KSS to $65. Mike Cintolo, Cabot Top Ten Trader Almost every retailer was hit hard by the pandemic, with widespread store closures and huge declines in retail sales. But a select few thrived, including those offering low prices and who boosted their online business, and Big Lots was able to do both. The retailer has been delivering with an appealing merchandising mix at discount prices and an inviting store format. But online sales have given the company an even bigger boost. The Columbus, Ohio-based discount retailer recently reported fiscal fourth-quarter profit that beat expectations and provided an upbeat outlook. Sales grew 8% to $1.74 billion, almost all of which came from same-store sales growth (up 7.9%), while e-commerce revenue leapt a huge 130%. On the bottom line, earnings also rose 8% and topped estimates by a few pennies. Most important was the outlook, with management seeing first-quarter earnings actually up from a year ago (when the firm first saw the benefits of the pandemic), with same-store sales up in the low single digits. That had analysts nudging up their estimates and thinking that the company will earn nearly $6 per share this year (likely conservative). Throw in a decent dividend (1.9% annual yield) and Big Lots should be able to benefit from continued upside in investor perception. Technically, Big Lots shares took a hit along with the entire market with the pandemic outbreak this time last year, but the motored into the mid-$50s by the end of summer. After a multi-month correction, buyers returned, with BIG hitting new highs in January, and moving up again after earnings. We're OK taking a stab at it on a pullback. Bernie Schaeffer, Schaeffer's Investment Research Costco Wholesale , a popular stay-at-home staple, and Walmart , were both pre-pandemic outperformers but of late have been struggling with hopes of a reopening economy. Our senior market strategist Chris Prybal and senior quantitative analyst Rocky White flagged and gathered interesting data that shows us when we may see a rebound from the now lackluster retailers. Starting with COST, over the past 10 years the equity has seen seven pullbacks to its 500-day moving average, of which boasted plenty of notable gains, in both the one- and three-month time frames. Three-month returns garnered the highest gains, averaging 12.2%, while positive 86% of the time. The median return came in at 15.7% for the same period, suggesting that by early June, Costco stock has a decent chance of being well on its way back into record-high territory. For the one-week, one-month, and three-month returns anytime during the past decade, the latter-most time frame only produced a 71% positivity rate. Channeling Walmart, over the past 10 years the equity has seen 10 pullbacks to its 500-day moving average, of which, also garnered upbeat returns. However, the post-signal returns for Walmart stock came in significantly lower than those for COST. One-month returns posted the highest gains, averaging 4.2%, with a 60% win rate. So what does this mean moving forward for these retail giants? This data is unable to take into account is how stay-at-home stocks will recover in the wake of President Biden's freshly passed $1.9 trillion relief bill, or the surge in vaccine rollouts that have left many investors more hopeful and eager to invest in sectors that will thrive when more of the economy opens up. On the other hand, if past is precedent, then these retailers -- especially Costco stock -- are bound to see some type of resurgence within the next few months. Rich Moroney, Dow Theory Forecasts The death of bricks-and-mortar retailing has been greatly exaggerated. The middle of the market faces pressure, but companies serving high-end or discount niches can do fine. Just ask Dollar Tree , a super discounter planning to add 600 new stores this year. Improved finances and tailwinds in the form of lower Covid-related expenses, better cost controls, reduced store-manager turnover, and a refined merchandise mix all add to the bullish story. Dollar Tree operates more than 15,600 stores across the contiguous U.S. and five Canadian provinces. Brands include Dollar Tree, Family Dollar (acquired in 2015), and Dollar Tree Canada. Dollar Tree stores typically offer a broad range of merchandise at a single price point -- $1. The Dollar Tree Plus! section sells products for $3 and $5, a concept that exceeded expectations in the January quarter and will expand from the current base of 120 stores to 500 by August. COVID lockdowns and the lack of events such as parties or social gatherings crimped results. Fortunately, January boasted the strongest monthly sales comparison since April 2019. Overall, the company plans to add 400 Dollar Tree and 200 Family Dollar stores this year, including formats combining the Dollar Tree and Family Dollar brands under one roof. This concept focuses on rural communities with 3,000 to 4,000 residents. Early results from the roughly 50 combo stores in operation have been promising, delivering same-store sales of greater than 20% on average. For the year ended January, per-share profits for the company rose nearly 19% on an 8% sales gain. For the current fiscal year, the consensus calls for a 9% jump in profits to $6.16 per share on a 3% increase in sales. Per-share results should get a lift from the company's plans to buy back some $2.4 billion of its stock over the next two years. Dollar Tree, recently trading at 18 times this year's earnings estimate, offers a compelling value as a leader in the discount end of the retailing market. The stock is a Long-Term Buy.

Big Box Buys: Six Favorite Discount Store Stocks

Top investment experts highlight their favorite ideas among big box retailers and discount stores.

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