4 Retail Discount Stocks to Watch as Industry Juggles Tariff Woes

Industry Overview - The Retail – Discount Stores industry is facing challenges from shifting consumer behaviors, intense competition, and evolving tariff policies, which are expected to impact the sector's trajectory [1] - Inflation is affecting household budgets, leading to more cautious spending even in traditionally resilient discount categories [1] - Rising labor and sourcing costs are significant hurdles for retailers operating on thin margins [1] - To regain momentum, discount retailers need to rebuild consumer confidence and spending capacity through strategic pricing, inventory optimization, and operational efficiencies [1] Key Industry Trends - Muted Consumer Demand Raises Revenue Concerns: Inflation and geopolitical issues are straining consumer purchasing power, with the consumer sentiment index dropping to 50.8 from 57.0, marking the fourth consecutive month of decline [4] - Cost Overhang Likely to Keep Margins Under Pressure: The competitive landscape, particularly from e-commerce, is pressuring margins due to high costs associated with digital enhancements and marketing [5] - Consumers Seek Better Bargains: There is a growing demand for discounted prices among low- to middle-income groups, prompting retailers to innovate and enhance their digital capabilities [6] - Digitization Key to Sector's Resilient Growth: Retailers are investing in digital platforms and improving supply chains to adapt to changing consumer shopping patterns, including curbside pickup and contactless payment solutions [7] Industry Performance - The Zacks Retail - Discount Stores industry currently ranks 167, placing it in the bottom 32% of over 250 Zacks industries, indicating bleak near-term prospects [8][9] - The industry's earnings estimate has declined by 5.6% since the beginning of 2025, reflecting a negative earnings outlook [10] Market Comparison - Over the past year, the Zacks Retail – Discount Stores industry has outperformed the broader Retail – Wholesale sector and the S&P 500, with a collective stock advance of 15.8% compared to 11.5% and 5.5% respectively [11] Current Valuation - The industry is trading at a forward 12-month price-to-earnings (P/E) ratio of 31.47, significantly higher than the S&P 500's 19.94 and the sector's 22.09 [14] Notable Companies - Costco: The company is benefiting from growth strategies, better price management, and strong membership trends, with a projected revenue growth of 7.8% and EPS growth of 11.6% [17][18] - Target: Target is evolving its business model with a focus on omnichannel capabilities and advanced technologies, expecting sales growth of 0.9% and EPS growth of 1.4% [21][22] - Dollar General: The company is leveraging its value-creating initiatives and defensive product mix, with a projected sales growth of 3.7% [25][26] - Burlington Stores: The company is adapting to consumer trends and enhancing its merchandising capabilities, with expected revenue growth of 7.8% and EPS growth of 12.6% [29][30]