In this article, we will look at the 7 best department store and discount retailer stocks to buy.

Consumer Sentiment Across the US

Consumer sentiment in the US is recovering: it rose to a six-month high in August as the positive ripples of optimism over the economic outlook spread across the country. This improved consumer confidence reading was reported by the Conference Board at the end of August, highlighting the perception that business conditions across the country are likely to improve over the coming six months. The results also suggested that the chances of an oncoming recession are declining. The consumer confidence index by the Conference Board rose to 103.3 in August from 101.9 in July, its highest level since February.

However, Americans are still anxious. Concerns about the labor market are soaring, especially after the unemployment rate in the country rose to 4.3% in July, almost a three-year high. The Federal Reserve appears to be mirroring public concerns about the labor market. In a highly anticipated speech to the Kansas City Fed’s annual economic conference, Jerome Powell, Federal Reserve Chair, said that increasing cooling in the job market would be unwelcome. He expressed optimism about inflation rates in the country, claiming that they appeared within the 2% target by the US Central Bank.

“The time has come for policy to adjust,” Powell said. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

The rapid increase in unemployment is mostly driven by slow hiring, rather than rising layoffs. However, Powell claimed that:

“We do not seek or welcome further cooling in labor market conditions,” he said. “We will do everything we can to support a strong labor market as we make further progress toward price stability.”

Consumer prices in the US rose moderately in July. A report released by the Labor Department at the end of August marked the third consecutive month of tame consumer price readings. Producer prices rose slightly in August to suggest a downward trend for inflation. Reports of falling inflation are running alongside business anecdotes claiming that consumers are employing bargain-hunting tactics to push back against high prices. Consumers are also reducing their purchases and are switching to lower-priced substitutes, which is a promising trend for discount retailers with competitive pricing. Moreover, with rate cuts around the corner, these stocks are poised to do well.

Now that we have taken an overview of the consumer sentiment across the US, let’s look at the 7 best department store and discount retailer stocks to buy.

Our Methodology

We used the Finviz stock screener to identify stocks in the department stores and discount retailers businesses. We then shortlisted the stocks that were the most widely held by hedge funds, as of Q2 2024. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

7 Best Department Store and Discount Retailer Stocks to Buy

7. Nordstrom Inc. (NYSE:JWN)

Number of Hedge Fund Holders: 34

Nordstrom Inc. (NYSE:JWN) is one of the leading American retailers specializing in upscale department stores. It is famous for offering exclusive offerings and personalized service, including the Nordstrom Rack stores, which maintain the company’s loyal customer base and competitive position as customers continue seeking premium shopping experiences.

The company’s significant focus lies in its omnichannel strategy and digital transformation endeavors to bolster its e-commerce presence. Nordstrom (NYSE:JWN) integrated its e-commerce platform with physical stores, offering customers a streamlined shopping experience in its online and offline channels. This strategy has also supported growth in online sales, employing data-driven marketing to personalize customer interactions. It is also expanding its physical presence, opening new stores in California, Houston, Florida, North Carolina, and Arizona between June and August 2024. This expansion has been continuing across the country since the beginning of the year.

In its latest Q2 2024 earnings report, Nordstrom (NYSE:JWN) reported earnings per share of $0.84, which surpassed analyst expectations and highlighted the company’s operational efficiency and cost management. Overall, the company’s pricing strategies and better inventory caused its gross profit margin to jump from 34.5% to 35.2%.

The company is focusing on continuing its expansion while improving inventory management and supply chain and increasing sales through promotional events such as the Anniversary Sales. Such efforts are expected to solidify its market presence and improve consumer demand. Nordstrom (NYSE:JWN) ranks seventh on our list of the 7 best department store and discount retailer stocks to buy and is held by 34 hedge funds as of Q2 2024.

6. Dollar Tree Inc. (NASDAQ:DLTR)

Number of Hedge Fund Holders: 38

Dollar Tree (NASDAQ:DLTR) is a Virginia-based multi-price-point chain of discount variety stores supported by a nationwide logistics network spanning 24 distribution centers. It operates more than 15,000 stores across the country and holds a competitive advantage with its wide array of discounted merchandise offered in convenient neighborhood stores.

In 2024, Dollar Tree (NASDAQ:DLTR) acquired leases for 170 “99 Cents Only” stores across California, Arizona, Texas, and Nevada. It is also acquiring the North American Intellectual Property of 99 Cents Only stores as part of the deal, including select on-site furniture, equipment, and fixtures. The acquisition is a step forward in the accelerated growth strategy for the brand, and an opportunity for expansion in priority markets with strong profitable growth potential.

Dollar Tree (NASDAQ:DLTR) ranks sixth  on our list of the 7 best department store and discount retailers stocks to buy. It has a consensus Buy rating among analysts, and its median price target of $81.65 implies an upside of 58.60% from current levels. The company’s total revenue increased 8.02% since last year, and its EPS is expected to grow at double digits in the coming years.

Here is what Madison Investors Fund stated regarding Dollar Tree, Inc. (NASDAQ:DLTR) in its Q2 2024 investor letter:

“Dollar Tree, Inc. (NASDAQ:DLTR) underperformed following a plethora of concerns: weakness surrounding the low-end consumer, pricing actions by peers, and disappointing sales at the core Dollar Tree banner. In addition, the significant news that management has placed the struggling Family Dollar banner under strategic review was received skeptically by investors. Despite these concerns, we are encouraged by the long-term prospects of the multi-price initiatives at the Dollar Tree banner and are entirely supportive of management’s effort to enhance value by evaluating alternatives for Family Dollar. We also see a comfortable margin of safety in the shares at the current price.”