Amid rising concerns over multi-decade high inflation, the Federal Reserve raised its benchmark interest rate by 50 basis points yesterday, its largest hike since 2000. Fed Chairman Jerome Powell said, “Inflation is much too high, and we understand the hardship it is causing. We are moving expeditiously to bring it back down.” The Fed’s aggressive interest rate hike plans are expected to exacerbate the economic slowdown.
Many analysts also expect the economy to witness recessionary pressures due to the lingering macroeconomic and geopolitical headwinds. In addition to the high inflation numbers reported in March, jobs data suggests a tight labor market. Furthermore, peace talks between Russia and Ukraine have shown little progress so far. As a result, supply disruptions continue to worsen, and energy and commodity prices remain at uncomfortably high levels. Crude oil prices have been hovering above $100 per barrel. And high crude oil prices have historically precipitated recessionary conditions.
However, discount retail stocks tend to perform well during a recession because these companies cater to cost-conscious consumers. Moreover, the demand for consumer staples and other necessity items, such as household and personal products, is highly inelastic. When prices are high, people do not cut down on their expenditure on non-discretionary items, instead, they try to purchase non-discretionary items in bulk to reduce their overall spending. This enables discount retail stores to maintain stable earnings and cash flows even during a recession. Given this backdrop, we think it could be wise to bet on quality discount retail stocks Costco Wholesale Corporation (COST), Walmart Inc. (WMT), BJ's Wholesale Club Holdings, Inc. (BJ), PriceSmart, Inc. (PSMT), and Target Corporation (TGT).
Click here to checkout our Retail Industry Report for 2022
Costco Wholesale Corporation (COST)
Famous membership warehouse operators COST in Issaquah, Wash., offers branded and private-label products throughout a range of merchandise categories. It operates across the U.S., Canada, United Kingdom, Japan, and China. In addition, its broad product portfolio includes almost everything from dry groceries to automotive care products. It currently operates 824 warehouses.
COST’s total revenue increased 15.9% year-over-year to $51.90 billion for the second quarter, ended Feb. 13, 2022. The company’s attributable net income increased 36.5% year-over-year to $1.29 billion. Also, its EPS was $2.92, representing a 36.4% increase year-over-year.
Analysts expect COST’s EPS and revenue for its fiscal 2022 to increase 18.1% and 13.2%, respectively, year-over-year to $13.10 and $221.76 billion. It surpassed consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 45% in price to close the last trading session at $544.43.
COST’s POWR Ratings reflect solid prospects. According to our proprietary rating system, it has an overall B rating, which translates to a Buy. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting.
It has a B grade for Stability and Sentiment. It is ranked #19 out of 38 stocks in the A-rated Grocery/Big Box Retailers industry. Click here to see the additional ratings of COST for Growth, Value, Momentum, and Quality.
Walmart Inc. (WMT)
Famous retailer WMT in Bentonville, Ark., operates supercenters, supermarkets, hypermarkets, warehouse clubs, cash and carry stores, discount stores, membership-only warehouse clubs, and e-commerce websites, including walmart.com and Walmart.com.mx flipkart.com, and others. The company operates through the Walmart U.S., Walmart International, and Sam’s Club segments.
On Jan. 25, 2022, WMT announced that it had signed an agreement to invest in indoor vertical farming company Plenty. The equity investment is part of a broader strategic partnership to utilize Plenty’s indoor vertical farming technology platform to deliver fresh produce to WMT’s retail stores. The Chief Merchandising Officer of Walmart U.S. said, “This partnership not only accelerates agricultural innovation but reinforces our commitment to sustainability by delivering a new category of fresh that is good for people and the planet.”
For its fiscal year ended Jan.31, 2022, WMT’s total revenue increased 2.4% year-over-year to $572.75 billion. The company’s adjusted operating income increased 12.3% year-over-year to $26.05 billion. Also, its adjusted EPS came in at $6.46, representing a 17.8% increase year-over-year.
For its fiscal 2024, WMT’s EPS and revenue are expected to increase 7.4% and 3.4%, respectively, year-over-year to $7.27 and $611.17 billion. It surpassed consensus EPS estimates in each of the trailing four quarters. Over the three months, the stock has gained 10.9% in price to close the last trading session at $154.62.
WMT’s POWR Ratings reflect solid prospects. The stock has an overall A rating, which equates to a Strong Buy in our proprietary rating system.
It has a B grade for Growth, Stability, Sentiment, and Quality. It is ranked #7 of 38 stocks in the Grocery/Big Box Retailers industry. To see the other ratings of WMT for Value and Momentum, click here.
BJ's Wholesale Club Holdings, Inc. (BJ)
BJ operates warehouse clubs in the eastern United States along with its subsidiaries. The Westborough, Mass., company offers perishables, edible grocery, general merchandise, non-edible grocery products, gasoline, and ancillary services. Also, it sells its products through its mobile app and websites that include BJs.com, Wellsleyfarms.com, berkleyjensen.com, and others.
On April 29, 2022, BJ announced the opening of BJ’s market, a new concept club in Warwick, R.I. BJ’s market will feature top-selling fresh foods, produce, sundries, and seasonal products for BJ’s Wholesale Club members. BJ’s Executive VP, Strategy and Development Bill Werner said, “BJ’s market will serve as an exciting new innovation lab for BJ’s Wholesale Club.”
BJ’s total revenues increased 10.4% year-over-year to $4.35 billion for the fourth quarter, ended Jan. 29, 2022. The company’s adjusted EBITDA increased 11.8% year-over-year to $228.60 million. Also, its adjusted net income increased 13.1% year-over-year to $109.90 million. And its adjusted EPS came in at $0.80, representing a 14.3% increase year-over-year.
Analysts expect BJ’s EPS and revenue for its fiscal 2024 to increase 12% and 7.4%, respectively, year-over-year to $3.65 and $19.04 billion. It surpassed The Street’s EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 50% in price to close the last trading session at $67.25.
BJ’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, which equates to a Buy in our proprietary rating system.
It has a B grade for Growth and Value. Again, it is ranked #15 in the Grocery/Big Box Retailers industry. Click here to see the other ratings of BJ for Momentum, Stability, Sentiment, and Quality.
PriceSmart, Inc. (PSMT)
PSMT operates shopping warehouse clubs across the United States, the Caribbean, and Colombia. The San Diego, Calif., company sells brand name and private label consumer products, essential goods, fresh produce, prepared foods, and fresh-baked goods, and provides optical services, tire centers, and other services.
On March 29, 2022, PSMT announced a land purchase in the El Poblado area of Medellin, Colombia, where it started constructing its second warehouse club. The company plans to open the El Poblado club in 2023. PSMT CEO Sherry S. Bahrambeygui said, “We have long sought a suitable site in this very densely populated and growing area of El Poblado, Medellin. We believe the demographic profile around this location closely aligns with the value proposition we are known for. We look forward to serving both new and existing members.”
For its fiscal second quarter, ended Feb. 28, 2022, PSMT’s total revenues increased 10.7% year-over-year to $1.03 billion. The company’s net income increased 11.4% year-over-year to $31.46 million. And its EPS came in at $1.03, representing an increase of 11.9% year-over-year.
For the quarter ending Aug. 31, 2022, PSMT’s EPS is expected to increase 20.6% year-over-year to $0.76. Its revenue for its fiscal 2022 is expected to increase 9.8% year-over-year to $3.98 billion. It surpassed consensus EPS estimates in three of the trailing four quarters. And over the past three months, the stock has gained 20.3% in price to close the last trading session at $82.25.
PSMT’s strong fundamentals are reflected in its POWR Ratings. It has an overall B rating, which equates to a Buy in our proprietary rating system.
It has a B grade for Stability. Within the Grocery/Big Box Retailers industry, it is ranked #29. To see the additional ratings of PSMT for Growth, Value, Momentum, Sentiment, and Quality, click here.
Target Corporation (TGT)
TGT is a Minneapolis, Minn.-based general merchandise retailer selling products through its stores and digital channels. The company sells an assortment of available merchandise and food. The company’s product category includes apparel and accessories, beauty and household essentials, food and beverage, hardlines, and home furnishing and décor. Its brands include Art Class, Smartly, Auden, Joylab, Colsie, Wild Fable, Open Story, etc.
On March 1, 2022, TGT announced plans to invest up to $5 billion to continue scaling its operations in 2022. The investment will go to its physical stores, digital experiences, fulfillment capabilities, and supply chain capabilities that further differentiate its retail offering and drive sustained growth. Chief Financial Officer of TGT, Michael Fiddelke, said: “We see substantial opportunities to build on our core capabilities to drive deeper guest engagement and long-term growth.”
TGT’s total revenue increased 9.4% year-over-year to $30.99 billion for the fourth quarter, ended Jan. 29, 2022. The company’s net earnings increased 11.9% year-over-year to $1.54 billion. Also, its adjusted EPS came in at $3.19, representing a 19.4% increase year-over-year.
Analysts expect TGT’s EPS for its fiscal 2024 to increase 9.2% year-over-year to $15.91. Its revenue for the quarter ending July 31, 2022, is expected to increase 4.7% year-over-year to $26.26 billion. It surpassed the consensus EPS estimates in each of the trailing four quarters. And over the past year, the stock has gained 12.2% in price to close the last trading session at $237.43.
TGT’s POWR Ratings reflect solid prospects. The company has an overall B rating, which translates to a Buy in our proprietary rating system.
It has a B grade for Value, Sentiment, and Quality. It is ranked #13 in the Grocery/Big Box Retailers industry. Click here to see the other ratings of TGT for Growth, Momentum, and Stability.
Click here to checkout our Retail Industry Report for 2022
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COST shares rose $0.56 (+0.10%) in premarket trading Thursday. Year-to-date, COST has declined -3.80%, versus a -9.94% 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.
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