With higher interest rates and sticky inflation undercutting the purchasing power of most consumers, value retailers are holding up against a broader spending pullback as anxiety over the economy prompts shoppers to seek discounts and deals. Many of the off-price retailers, such as TJX Cos (TJX), Ross Stores (ROST), and Burlington Stores (BURL), are set to post higher sales in the upcoming Q3 earnings reports. That contrasts with high-end luxury names such as LVMH Moet Hennessy Louis Vuitton and Tapestry Inc.
Discount retailers are on track to report strong quarterly earnings results as cost-conscious consumers continue to lend momentum to the year-long sales recovery. Ross Stores and TJX Cos, owner of T.J. Max and Marshalls, are on track for their first double-digit sales growth in seven quarters for the October-through-December period. Also, Burlington Stores is expected to post double-digit sales growth in two consecutive quarters starting in Q3.
Even with an early start of holiday sales promotions, U.S. retail traffic dropped in October with the resumption of student loan repayments, a cooling labor market, and higher interest rates. The reluctance among households to spend on big-ticket items, however, is less likely to hurt retail chains such as Dollar Tree (DLTR), Five Below (FIVE), and Miniso Group Holding Ltd, which offer lower-price goods compared to brand department stores.
Five Below, which sells snacks and personal accessories to teenagers, is forecast to grow sales by +19% in Q4, up from an estimate of +13% in Q3. Miniso Group Holding, which sells small electronics and toys, is also expected to see an increase in sales, rising an estimated +34% in Q3 of 2023 and +45% in Q4. Discount variety store operator Dollar Tree is seen nearly doubling revenue growth to +13% in Q4 compared to the average estimate for the previous three months.
Big-box retailers, such as Walmart (WMT), Target (TGT), and Dollar General (DG), that sell groceries alongside more general merchandise will also see a boost to their sales from penny-pinching consumers. However, their broader range of offerings will prove a drag on earnings comparisons due to the base effects of comparing against last year’s elevated food prices. Walmart’s quarterly revenue growth is seen decelerating at least until the end of this year and Target’s sales are seen contracting in Q3.
With headwinds mounting for consumers, discount and value retailers should see strong demand as consumers seek out discounts and deals. Bloomberg Intelligence said, “Whenever we see consumers under pressure, we tend to see a flight to value.”
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
