But they're not.
Retail sales aren't picking up as fears of a recession continue to loom. Crashing stock markets, depressed crude oil prices, and slowing economic activity in China are adding to the bad news. The National Retail Federation estimates that retail sales will grow 3.1% in 2016, down from 4.1% in 2015. That's still higher than the 10-year average of 2.7%, which includes the Great Recession years.
Jittery American shoppers, especially the middle class, are flocking to small-format and bargain stores, which survived during the Great Recession and have benefited ever since owing to a switch by shoppers to a more frugal mindset. Select stocks in this "bargain store" niche are also ideal for your long-term wealth building plan.
As anxiety and uncertainty rule the mind of the consumer, this industry is only poised to gain. According to Moody's Investors Services, the dollar-store sector will likely continue to benefit from low price points and locations that are convenient for cash-strapped shoppers.
Here, we examine the major developments that will influence the industry this year and beyond. We also pinpoint the best stocks to bolster your portfolio.
Walmart's entry into the world of small-format and dollar stores through Walmart Express in 2011 looked like a massive threat to other smaller and independent players in the industry.
However, after just about five years, the retail giant announced that it would be shuttering all 102 Walmart Express stores. The retailer failed to create the magic it did with its big-box format among shoppers in urban areas, stemming from issues ranging from product mix and pricing to supply chain logistics.
With the exit of Walmart, established players such as Dollar Tree (DLTR - Get Report) now have the market all to themselves, and they are expanding quickly.
We've already seen the first deal play out in this space. In mid-2015, Dollar Tree completed the takeover of Family Dollar Stores for $9 billion. Family Dollar is a company that even Walmart and Dollar General had their sights on. Dollar Tree has now trumped Dollar General to become the largest discount retailer in the U.S.
The next possible target could be Epic Stores (EPSC) , which caters to the preowned goods market. Founded in 2010 and based in Phoenix, Epic Stores offers trendy but second-hand clothing, accessories and household products at deeply discounted prices. The company operates 10 retail stores in four states. It also operates in Southwestern states with high population growth.
Epic Stores announced a new round of growth financing.
With the resale industry's scope pegged at $16 billion a year in revenue, Epic Stores, at an enterprise value of more than $42 million, could make an attractive takeover pick for an acquirer looking to establish a quick presence in Epic's specific regional markets.
Now we'll look at the three stocks in the sector that are tapped into the long-term trend of bargain shopping growth, which makes them ideal for your retirement portfolio.
1. Dollar Tree
After the acquisition of Family Dollar, Dollar Tree faced some speed bumps with integration. The company has missed analyst estimates on earnings per share over the last three quarters. Yet, if we look at the price of the stock, Dollar Tree has outperformed the S&P 500. Over the last 12 months, Dollar Tree has gained 2%, while the S&P 500 has fallen 9.7%.
Analysts are bullish on the discount store. Dollar Tree's EPS is expected to jump 43% in the current fiscal year, which ends in January 2017.
In December, analysts from RBC Capital Markets said that they were convinced that the company "has tremendous 'self help' capabilities and earnings power, with 20%-25% growth expected in 2016-2017." Telsey Advisory recently upgraded the stock to outperform.
2. Dollar General
Even though the company made its stock market debut in 2009 at the peak of the recession, Dollar General has carved a niche for itself. The discount retailer is up a whopping 200% since its debut.
The Tennessee-based company may have been dethroned as the biggest discount retailer by the combined entity of Dollar Tree and Family Dollar. Like the others, however, prospects are bright for this retail player, which is scouring for possible takeover targets that could expand its footprint.
Dollar General will particularly benefit from the closing of Walmart Express stores, because its stores are closer to the former than those of its rivals, according to Piper Jaffray. Financially, Dollar General is well on course to get a $11.4 million tax break, which will help the company's profitability in the coming year.
Over the next five years, analysts expect annual earnings growth of 14%, above their expectations of 13.1% for the industry and 5.5% for the S&P 500. The median 12-month price target from analysts who cover the stock is $82, which suggests the stock can rise 11% from recent levels. If you're looking for stocks with momentum for the long haul, Dollar General fits the bill.
3. Big Lots
Shares of nontraditional, discount retailer Big Lots may be off 20% over the past year, but that isn't necessarily a bad thing because it gives value investors a chance to load up on the stock. The weakness in the stock has brought down the forward price-to-earnings (P/E) multiple to 11 compared to DG's 16 and DLTR's 21.
Over the past four quarters, the company has mostly beat analyst estimates on EPS, and analysts expect EPS to grow 20% this year.
The discounter's improving cash flow and a lower industry average debt/equity ratio also are big positives.
Analysts have a 12-month median price target of $50 on the stock, which suggests it can gain 32% from recent levels.
Other stocks in the segment worth looking at are Fred's (FRED - Get Report) , Five Below (FIVE - Get Report) andOllie's Bargain Outlet (OLLI) .
Fred's is repositioning its product assortment to focus on convenience and consumables. Its change in focus to high-margin products will also augur well for the stock.
Philadelphia-based Five Below is showing signs of a rebound with profits expected to rise 25% to 76 cents a share in the fourth quarter. The turnaround has been helped by success of its new stores and investments in e-commerce. The stock has come down from the high forward price-to-earnings ratio it had in 2014 to about 27 right now, making it an attractive proposition.
Finally, Pennsylvania-based Ollie's is a relatively new kid on the block, making its IPO debut in July 2015. While the stock got off to a rough start, Ollie's has comfortably beaten analyst estimates so far on EPS. The company also raised full-year guidance for fiscal 2015, which ended Jan. 30. As the industry gains momentum in the coming years, Ollie's, too, will rally along with other major players.
By Siddhi Bajaj
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