Over the past couple of years, we saw an unprecedented boom in consumer spending. With the government stimulus payments and programs such as the freeze on student loan payments, consumers were flush with cash to spend.
But these trends have now reversed. Stimulus programs long ago ran out, debt repayments have started up again and inflation is hitting hard. Add it all up and U.S. retail sales dipped into negative territory in October as consumers, facing higher credit card balances, seem to be pulling back.
This is hitting discretionary firms hard, with sectors such as luxury retail on the decline. But there should be a trade-down effect here that works to the benefit of more value-focused retailers. These are three leading discount retailer stocks that will take advantage of this trend.
Dollar General (DG)
Dollar General (NYSE:DG) is one of America’s large chains of dollar stores.
These have developed a proven appeal with people that are maximizing purchasing power. In addition, Dollar General has invested heavily in building out stores in rural areas where there is little competition. This has, in effect, given Dollar General something akin to a local monopoly in many smaller communities.
Despite Dollar General’s strengths, the company fell onto hard times over the past year. The labor shortage left many Dollar General stores understaffed which in turn led to a number of media scandals around store safety and cleanliness. In addition, profit margins dipped due to supply chain issues.
At the end of the day, however, Dollar General’s issues are fixable. And the softening economy should bring Dollar General’s core customer base back to the stores in droves next year. With DG stock down nearly 50% over the past year, investors can get in at an attractive 17 times forward earnings for this leading bargain retailer.
Here’s a fun fact. Out of the 30 stocks that make up the Dow Jones Industrial Average, Walmart (NYSE:WMT) was the only one whose stock went up between 2007 and March 2009. Put another way, Walmart was one of the only big blue-chip companies in America to produce a positive return during the onset of the 2008 Financial Crisis.
This success probably shouldn’t be too surprising. Walmart has unmatched expertise in brick-and-mortar sales and ground logistics. The company’s ruthless efficiency and unwavering commitment to everyday low prices has given Walmart an incredibly strong brand and competitive position.
Walmart is not the most glamorous shopping experience. But in times of economic duress and heightened inflation, Walmart’s appeal to bargain shoppers is unmatched.
Walmart has cautioned that it sees weaker consumer spending in 2024. That’s not surprising given the macroeconomic environment. Regardless, Walmart recently posted strong quarterly earnings and raised guidance. Investors can count on WMT stock to deliver the goods regardless of whether a recession starts next year.
Ross Stores (ROST)
Ross Stores (NASDAQ:ROST) is a leader discount apparel and home goods and fashion retailer.
In essence, Ross brings shoppers the outlet experience, but at convenient urban locations rather than out-of-the-way outlet centers.
Ross has a competitive advantage thanks to its large store base, with more than 2,000 operating locations across its various brands. In addition, it has strong merchandise sourcing and has developed a “treasure hunt” style atmosphere with large discounts versus full-price competitors.
In addition, other retailers’ struggles should benefit Ross. We’ve seen a number of rivals like Bed Bath & Beyond and Big Lots (NYSE:BIG) either go bankrupt or run into deep financial trouble. That should allow Ross to gain market share, and that’s doubly true in a recession when consumers look for the cheapest available shopping options.
On the date of publication, Ian Bezek held a long position in DG stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.