The current status of the economy, geopolitical tensions, supply chain disruptions, and several other factors have all been combined in the past few years to transform the way consumers approach retail stores and what they expect of them.
Transforming Consumer Demands
Four months into 2023, it is becoming clear that the post-pandemic consumer is now expecting nothing less than the best from their retail experience. In light of this, department and retail stores such as Macy's, Inc. (NYSE:M), The Home Depot, Inc. (NYSE:HD), and Walmart Inc. (NYSE:WMT) will have to ensure that they meet the rapidly changing expectations consumers hold of them. A Deloitte report on the outlook for the retail industry in 2023 published in February gives us a few examples of several of these new expectations. First, consumers now expect the best price for goods on sale in the most convenient way possible. Second, consumers seem to now expect a seamless shopping experience across different channels. Third, retail executives believe that price will outweigh brand or retailer loyalty in 2023.
To meet the first of these needs, retailers have begun offering services such as curbside pickup, same-day delivery, and payment plans to increase the convenience of shopping for consumers. However, this has resulted in an increase in customer acquisition and retention costs for retailers themselves. This is a trend that has been observed since before the pandemic though, since between 2013 and 2018, acquisition costs had already increased by over 60% for major retailers. Regarding the second expectation, most retail executives believe that while consumers will expect more seamless shopping experiences, they will also be more price-conscious and thus likely to shift sources as they shop. This reality is demonstrated by the fact that the middle class currently holds less wealth than the top 1% of affluent Americans and a millennial who is aged 40 today has about 20% less net worth than a boomer did at the same age. The difference in the buying power of consumers today compared to those in the past has thus become a major factor of importance for retailers.
The Young American Consumer
Despite the above developments, retailers still have a silver lining in the form of younger consumers. According to a McKinsey report published in April, young consumers today still have the urge to spend more on retail. According to a survey conducted by McKinsey, about 40% of the younger consumers surveyed stated that they intended to splurge in 2023. Millennials with higher incomes are spearheading this demographic, with 70% of these consumers stating that are willing to spend more on retail in 2023. However, the report also shows that this indulgence seems to be selective. About 40% of the respondents to the survey said their big spending would be limited to restaurants, while 37% stated it would go towards groceries. An additional 33% mentioned apparel as their go-to option for splurging in 2023. These trends highlight the opportunities and barriers that currently exist within the retail industry, and which should be taken note of by major retailers today.
10 Best Department Store and Discount Retailer Stocks to Buy
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Let's now take a look at the 10 best department and discount retailer stocks to buy.
Our Methodology
To select the stocks for our list below, we used Insider Monkey's hedge fund data for the fourth quarter, when 943 hedge funds were tracked, to pick department store and discount retailer stocks that were popular among hedge funds in that quarter. We then ranked these stocks based on the number of hedge funds holding stakes in them, from the lowest to the highest.
Best Department Store and Discount Retailer Stocks to Buy
Nordstrom, Inc. (NYSE:JWN) is a broad-line retail company providing apparel, shoes, accessories, and home goods, among more. It is based in Seattle, Washington.
On March 8, analysts at Argus upgraded Nordstrom, Inc. (NYSE:JWN) shares from Hold to Buy.
In the fourth quarter, Nordstrom, Inc. (NYSE:JWN) generated revenues of $4.32 billion, beating the previous quarter's revenue of $3.55 billion. Analysts on Wall Street have placed an average price target of $18.62 on the shares. Considering the fact that the stock was trading at $15.22 on April 26, this gives Nordstrom, Inc. (NYSE:JWN) shares an upside potential of 22.34%.
Bourgeon Capital was the largest shareholder in Nordstrom, Inc. (NYSE:JWN) at the end of the fourth quarter, holding 78 shares. In total, 27 hedge funds were long the stock, with a total stake value of $223 million.
Mayar Capital, an asset management company, mentioned Nordstrom, Inc. (NYSE:JWN) in its second-quarter 2022 investor letter. Here's what the firm said:
“The second thought experiment comes from my own personal experience in the period around the financial crisis. In 2006 I made an investment in the shares of Nordstrom, Inc. (NYSE:JWN). Over the following three-and-a-half years, the stock was up by 36%, outperforming the S&P 500 by a very respectable 41.4%. A fund made up of a single holding in Nordstrom would have ranked in the top 1% of all funds in the Morningstar database.
Nordstrom, Inc. (NYSE:JWN), like Macy's, Inc. (NYSE:M), The Home Depot, Inc. (NYSE:HD), and Walmart Inc. (NYSE:WMT), is a highly popular departmental store stock.
Dillard's, Inc. (NYSE:DDS) operates retail department stores in the US. It is based in Little Rock, Arizona.
Analysts have placed an average price target of $333 on Dillard's, Inc. (NYSE:DDS). The shares were trading at $298.39 on April 28. This gives the stock an upside potential of 11.6%.
There were 28 hedge funds long Dillard's, Inc. (NYSE:DDS) in the fourth quarter. Their total stake value was $200 million.
Longleaf Partners Small-Cap Fund, an independent investment management firm, mentioned Dillard's, Inc. (NYSE:DDS) in its fourth-quarter 2020 investor letter. Here's what the firm said:
“Dillard’s (-48%, -2.80%; –, –), the department store, detracted for the year. We had successfully owned the company during a downturn before and felt that we were paying a low mid-single-digit multiple on stable FCF with a great management team in charge when we first initiated the position in 2019. Our case was supported by the potential for management to monetize part of the company’s valuable owned retail real estate footprint for higher and better uses. COVID lockdowns, however, permanently impaired these values, as well as the company’s ability to go on offense with share buybacks, despite great efforts during the crisis by CEO Bill Dillard. We sold our position in the second quarter as the price-to-value gap closed and our case had changed materially.”
Five Below, Inc. (NASDAQ:FIVE) is a specialty value retailer operating in the US. The company is based in Philadelphia, Pennsylvania.
Jason Haas, an analyst at Bank of America, holds a Buy rating on Five Below, Inc. (NASDAQ:FIVE) shares as of April 12.
Analysts on Wall Street have placed an average price target of $224.63 on Five Below, Inc. (NASDAQ:FIVE) shares, which were trading at $194.69 on April 26. This gives the shares an upside potential of 15.38%. Wall Street considers the stock to be a Strong Buy, with 16 Buy ratings, 1 Hold rating, and no Sell ratings. In the fourth quarter, Five Below, Inc. (NASDAQ:FIVE) generated revenues of $1.12 billion, representing a growth of 12.69% year-over-year.
There were 35 hedge funds long Five Below, Inc. (NASDAQ:FIVE) in the fourth quarter. Their total stake value was $869 million.
Wasatch Global Investors, an asset management company, mentioned Five Below, Inc. (NASDAQ:FIVE) in its fourth-quarter 2022 investor letter. Here's what the firm said:
“Another strong stock in the strategy was Five Below, Inc. (NASDAQ:FIVE). A specialty value retailer, the company offers a variety of merchandise at discounted prices. Five Below’s stock price rose sharply in early December after the company reported better-than-expected financial results and guided higher on revenues and earnings. The upbeat news cheered investors who had been concerned about Five Below’s ability to attract shoppers during the upcoming inflation-marred holiday season. We think the company’s debt-free balance sheet, substantial free cash flows, expanding store count and new Five Beyond format—in which prices can go as high as $25 in a designated section of the store—leave Five Below well-positioned for growth even in a potentially difficult retail environment.”
Dollar Tree, Inc. (NASDAQ:DLTR) is a company operating a collection of discount variety retail stores. It is based in Chesapeake, Virginia.
Scot Ciccarelli, an analyst at Truist, holds a Buy rating on Dollar Tree, Inc. (NASDAQ:DLTR) shares as of March 2.
Analysts on Wall Street see Dollar Tree, Inc. (NASDAQ:DLTR) as a Moderate Buy with seven Buy ratings and five Hold ratings. They have placed an average price target of $157 on the shares, with a high forecast of $187. Considering the fact that the shares were trading at $152.36 on April 26, this gives Dollar Tree, Inc. (NASDAQ:DLTR) an upside potential of 3.05%.
Dollar Tree, Inc. (NASDAQ:DLTR) was found among the 13F holdings of 38 hedge funds in the fourth quarter, with a total stake value of $2.6 billion. Mantle Ridge LP was the largest shareholder in the company, holding 11.4 million shares.
Madison Funds, managed by Madison Investment Management, mentioned Dollar Tree, Inc. (NASDAQ:DLTR) in its fourth-quarter 2022 investor letter. Here's what the firm said:
“Our largest individual detractors were Brookfield Corporation, Alphabet, Amazon, Black Knight, and Dollar Tree, Inc. (NASDAQ:DLTR). Alphabet’s price-to-earnings multiple continues to contract due to concerns about the potential for revenue to be more economically sensitive than it has been historically, given the vast size of the business today. At Amazon, cost pressures and slowing AWS growth weighed on its share price. The regulatory status of Intercontinental Exchange’s pending acquisition offer for Black Knight remains a concern, while in the interim, business conditions have deteriorated given the slowdown in the mortgage market. Lastly, Dollar Tree’s margin outlook disappointed as management is investing to drive traffic to their stores and improve Family Dollar operations.”
Macy's, Inc. (NYSE:M) is an omnichannel retail organization that operates stores, websites, and applications to sell a range of merchandise, such as apparel and accessories. It is based in New York.
On April 3, analysts at JPMorgan upgraded shares of Macy's, Inc. (NYSE:M) from Neutral to Overweight.
Macy's, Inc. (NYSE:M) generated revenues of $8.26 billion in the fourth quarter, beating the previous quarter's revenue of $5.23 billion. The average price target placed on shares of the company by Wall Street analysts is $24, while the shares were trading at $16.33 on April 26. This gives Macy's, Inc. (NYSE:M) an upside potential of 46.97%.
In total, 41 hedge funds were long Macy's, Inc. (NYSE:M) in the fourth quarter. Their total stake value was $879 million.
Macy's, Inc. (NYSE:M), like The Home Depot, Inc. (NYSE:HD) and Walmart Inc. (NYSE:WMT), is a department store stock many elite hedge funds are piling into today.
