At the beginning of 2024, retail stocks has a bright outlook. Consumer spending was holding up, the rate of inflation was easing, and there were expectations of an interest-rate cut.
That three-legged stool looks more unstable. The latest reading on inflation showed an uptick that is likely to follow oil prices higher, and Federal Reserve chair Jerome Powell is making it clear that investors should not count on rate cuts anytime soon.
Still, it’s not altogether crazy to invest in retail stocks. As the latest retail spending numbers showed, consumer spending is holding up. With late-filing consumers in line to receive their tax refunds in coming weeks, spending will remain strong.
That means some retailers will be in line to report solid earnings. And many of these stocks are offering good value for investors.
This doesn’t mean you have to focus on defensive stocks such as consumer staples. But you still want to focus on retail stocks with strong demand, growing earnings, and an e-commerce presence. Here are seven budget-friendly stocks to consider.
Bath & Body Works (BBWI)
Bath & Body Works (NYSE:BBWI) is a well-known specialty retailer of home fragrance, body care, and soaps and sanitizer products.
The company has a loyal customer base which is reflected in a base of approximately 37 million “loyalty” customers that accounted for about 80% of the company’s sales in 2023.
By almost any meaningful measure: free cash flow, operating margin, net margin, and earnings per share, Bath & Body Works had a solid year in 2023. But the stock is down 5.7% in the month following its fourth quarter and full-year earnings report.
That’s because the company forecast slightly lower guidance for 2024. And that guidance was given when the company was expecting near-term interest rate cuts.
However, at 13x forward earnings, BBWI stock is undervalued compared to the composite retail average of around 29x.
Analysts are forecasting a potential 14% upside in the stock price. And if analysts are correct about the 12.7% increase in earnings, investors may also be in line for a dividend increase.
Target (TGT)
Target (NYSE:TGT) was one of the heavily beaten-down retail stocks in 2023.
However, with the stock off to a 16% gain through mid-April, the stock is now up about 2% in the last 12 months. And there appears to be room for the stock to move higher.
Not all was rosy in the company’s fourth quarter earnings report. Year-over-year comparable store sales were down. The same was true for digital sales. But when it came to the metric that matters the most, earnings, the company reported a 58% YOY increase.
It’s true that the company offered cautious guidance. But that’s true for all retailers. TGT stock is attractively valued at 17.5x earnings.
Plus those earnings, even on the low end of the company’s guidance easily support an increase to the company’s dividend. That would make it 54 consecutive years of increases for Target.
Foot Locker (FL)
Foot Locker (NYSE:FL) is in a continued downtrend that’s been going on for over two years. FL stock is down 46% in the last 12 months and 29% in 2024.
The latest reason for investors to sour on the retailer was weaker than expected guidance.
However, the latest dip in FL stock may be a case of price discovery. That’s because there have been a handful of analyst upgrades since the company reported earnings in March.
Opinions are mixed, but the stock has a consensus price target that points to about 15% share price growth.
A key reason for this change in sentiment came from Nike (NYSE:NKE) which accounts for about 65% of Foot Locker’s sales. Nike has been moving to a direct-to-consumer model, but in the company’s last earnings report, it’s now saying it’s taking a closer look at its wholesaler strategy.
Foot Locker is also making a pivot to digital and cited an approximately 10% growth in YOY digital sales. And the company expects that number to grow by approximately 25% by 2026.
McDonald’s (MCD)
McDonald’s (NYSE:MCD) has been showing up in my social media feeds for the past few months. Some say the prices are too high, others say it’s still a value. Those familiar with the business model know that it depends on where you live.
The company is mostly franchisee-owned, and those franchises are free to set their own prices. The point being, how you perceive MCD stock may have a lot to do with how you perceive its value.
Not that pricing isn’t an issue. The company acknowledges as much. However, the company’s digital game, which it was working on before 2020, is on point, and a way for cash-strapped consumers to get instant daily deals.
Another consistent knock on MCD stock is that growth is behind it. But it should be noted that the company beat revenue and earnings estimates in every quarter in 2023.
The stock is up 38% in the last five years. Not eye-watering growth, but when you add in the dividend, a significant total return for investors.
Dollar General (DG)
Dollar stores were among the worst-performing retail stocks in 2023. And Dollar General (NYSE:DG) was no exception.
This reflects the effect that inflation has on the low-income consumers that are a core base of the dollar store model.
But after a double beat on earnings in March, investors are starting to see the value of DG stock. It’s true that higher-for-longer interest rates are a headwind. But as the company’s earnings report shows, investors may be too negative.
One reason that I’ve mentioned before is the company’s strategy regarding store location. The company ensures it’s located in rural areas and other spots not easily serviced by big-box retailers.
But that doesn’t mean Dollar General isn’t leaning into digital. The company has ramped up its digital presence with MyDG which gives consumers access to online-only coupons. In 2023, the company reported $381.3 million in digital sales. This was comparable to 2020, which shows that the pivot is going well.
In times of ongoing market volatility, you should be looking for undervalued stocks that are best in class. DG stock checks that box.
Tractor Supply Company (TSCO)
Tractor Supply Company (NASDAQ:TSCO) is a rural lifestyle retailer with over 2,200 stores in 49 states.
The company has been delivering mixed revenue and earnings results over the last year. TSCO stock is up 139% over the last five years. However, it’s only up about 1% in the last 12 months and that’s because of the 15% rally in 2024.
But this is a time to remember why you want to own a quality dividend stock. In February, the company raised its dividend for the fifteenth consecutive year. It’s been growing the dividend at around a 40% average over the last three years, but still has a sustainable payout ratio of around 48%.
There are a lot of reasons to like Tractor Supply Company as an undervalued retail stock. But the price action on TSCO stock shows that the stock recently broke above a level of resistance at $248.
After a pullback, that price is now being tested as a line of support. A bullish earnings report in late April may be the fuel that the stock needs to take the next leg higher.
Lovesac (LOVE)
Lovesac (NASDAQ:LOVE) rounds out this list of budget-friendly retail stocks. This is no value stock. Lovesact is a young company that is still in the expansion phase.
In its most recent quarter, it gave mixed results, but one shining star was expanding margins. That had been a problem for the company.
One time doesn’t make a pattern. But it should allow investors to focus on other positive developments such as a 15% increase in store count, positive cash flow that almost doubled between 2022 and 2023. That highlights the company’s inventory reduction that puts Lovesac in a good position as it waits for a more favorable monetary environment.
Short interest of over 30% is concerning. But institutional investors own 92% of the stock’s float and the overwhelming sentiment is bullish. That means investors with some appetite for speculation could see a small position slingshot higher if the company continues to deliver strong earnings.
On the date of publication, Chris Markoch had a LONG position in MCD. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.