We recently compiled a list of the 10 Best Discount Retailer Stocks to Buy. In this article, we will look at where Target Corporation (TGT) stands against other discount retailer stocks to buy.
Overview of the Discount Retail Sector
With half a decade of geopolitical chaos, recession in Europe, and above-target inflation, the US economy has remained resilient. The primary reason behind this is the American consumer: their spending makes up around 70% of the country’s gross domestic product. However, recent calculations have been showing a decline in amount of money Americans are spending.
A recent survey by accounting firm KPMG corroborated this pattern, finding that while people were optimistic about their economic standing, they harbored doubts and skepticism about the direction the US economy is headed. The survey also found that nearly 65% of participants expected to do more discount shopping this year. Around 60% of this number made $200,000 or more. In addition, around 14% said that they were planning to use buy now, pay later services.
Brian Moynihan, CEO of Bank of America, said that he also noticed a slowing in purchase rates of his customers. Consumer payments grew by 3.5% since last year, down from a 10% growth from the year before. This included measurement through checks, credit cards, and ATM withdrawals.
The discount retail industry in the US thus holds a promising outlook. This positive outlook is fueled by technological advancements, changing consumer preferences, and strategic adjustments. Shoppers across the retail industry are prioritizing value over everything else, including cheap prices. This is why retailers like Dollar Tree Inc. are struggling, while business in stores like Target and Walmart is booming. A similar trend is also taking place in other industries, with companies like Applebee undergoing increasing sales while consumer sentiments about giants like McDonald’s are showing signs of waning.
The Consumer Goods and Retail Outlook 2024 report by Economic Intelligence forecasts global retail sales to grow by 6.7% in dollar terms in 2024. While 85% of these sales are expected to stem from brick-and-mortar stores, 2024 is expected to be the strongest growth year for offline retail after 2021. Inflation is also easing in 2024, but that does not seem to affect increasing consumer preference for lower prices, prioritization of basic life goods, and an unwillingness to pay hefty delivery fees. These factors are likely to drive consumers on a bargain-hunt to discount retailers.
The discount retail industry is one of the most resilient sectors in the face of economic unpredictability, strengthened by its ability to offer affordable services and goods. Product discount campaigns are emerging across the country, showing positive development trends and becoming some of the hottest topics in retail. Effective inventory management, better pricing, and operational initiatives are likely to boost sales in discount retail companies, provided they offer the one thing customers are increasingly looking for: value.
The US led the largest market for discount store retail across the globe in 2023, amassing $128 billion in sales. According to data reported by The Wall Street Journal, average consumer spending on grocery items at discount retailers increased 71% between October 2021 and June 2022. In addition, consumer patterns are also showing an increased inclination towards e-commerce, which is pushing companies to solidify their digital presence. Successful retailers are endeavoring to meet their customers both in-store and online, which is why 9 out of the top 10 e-commerce websites are run by retailers with brick-and-mortar stores.
Similar trends are appearing across the world, with discount stores rising to a prominent industry standing over the past years in the US, Europe, and Japan. Zhang Qiang, founder and CEO of Hitgoo, a discount retail chain, said that the next decade in China is likely to be marked by discount store expansion. Since the discount store model focuses on food and daily use merchandise, it can be successful in both the domestic and international market, presenting new opportunities.
Our Methodology
We used the Finviz stock screener to identify stocks in the discount retailers business. We then shortlisted the stocks that were the most widely held by hedge funds, as of Q2 2024. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
10 Best Discount Retailer Stocks to Buy
Target Corporation (NYSE:TGT)
Number of Hedge Fund Holders: 52
Target (NYSE:TGT) is an American retail corporation that operates a chain of discount department stores and hypermarkets selling virtually everything, from clothing and groceries to electronics, sports, entertainment, and other general merchandise. It currently operates around 2,000 stores across the United States and plans to open more than 300 stores in the coming decade. In August alone, Target (NYSE:TGT) opened four new stores in Florida, South Carolina, and Texas.
Target’s (NYSE:TGT) EPS for Q2 2024 exceeded expectations by reaching $2.57, showing a 42% growth over last year. Its comparable sales grew by 2% in the same quarter, driven primarily by increased traffic. Apparel was one of the leading growth drivers, with comp sales rising by more than 3% due to the incorporation of newness, innovative design, and quality. The company’s All in Motion brand grew by resonating with a broader audience. The beauty and food and beverage sectors also drove growth, experiencing increasing consumer engagement due to increased variety. Target slashed prices on around 5,000 of the most frequently purchased items over the summer, further seeing increased sales.
Overall, Target (NYSE:TGT) is focusing on controlling what can be controlled and is directing attention to strong execution and retail fundamentals. It is also working on expanding its operating margin rate, aiming to move beyond its pre-pandemic annual rate of 6%. The company is also committed to continued disciplined capital deployment.
Target (NYSE:TGT) is trading at a P/E ratio of 16.17 at a 9.30% discount to its sector. It sports a consensus Buy rating among analysts, with its median price target of $153 presenting an upside of 17.17% from current levels. As of Q2 2024, Target (NYSE:TGT) is held by 52 hedge funds, with Diamond Hill Capital holding the highest stake worth $458.13 million. It ranks fourth on our list of the 10 best discount retailer stocks to buy.
Carillon Eagle Growth & Income Fund stated the following regarding Target Corporation (NYSE:TGT) in its Q2 2024 investor letter:
“Target Corporation’s (NYSE:TGT) sales continue to feel the consumer softness in discretionary goods. In addition, while margins are recovering, they are not up to expectations. Encouragingly, sales are sequentially increasing and comparable sales are expected to get easier as Target enters the back half of the year.”
Overall TGT ranks 4th on our list of the best department store and discount retailer stocks to buy. While we acknowledge the potential of TGT as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.