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.”

5. Dollar General Corp (NYSE:DG)

Number of Hedge Fund Holders: 42

Dollar General Corp (NYSE:DG) is a Tennessee-based chain of discount stores that operates more than 20,000 stores across the country and Mexico. In February, it celebrated the grand opening of its 20,000th store in Alice, Texas, and is continuing its rural expansion across the country. Dollar General (NYSE:DG) offers discounted deals and slashed prices on a wide array of offerings in its stores, including clothing, kitchenware, grocery items, pharmaceuticals, health supplies, outdoor furniture, and much more.

The stock fell after it reported its earnings for the second quarter. Its revenue grew by 4% year-over-year to $10.2 billion, but earnings per share fell by 20% to $1.70, below analyst estimates of $1.79. However, Dollar General Corp (NYSE:DG) is here to stay. The company announced that its primary base of consumers were lower-income shoppers, and factors such as rising unemployment, inflation, and interest rates had put them in a worse position as compared to six months ago. However, with inflation slowing down, the company is expected to make a recovery.

Around 60% of Dollar General’s (NYSE:DG) customers hail from a household income of less than $35,000 a year, for whom the company offers numerous deals and discounts. At the beginning of the summer, it offered 100+ back-to-school supplies below $1, with an additional 30% discount for educators. Discounts like these give the company a competitive advantage, especially when compared to its competitors who do not hold such every day low-price positions.

The company is now focusing on controlling what it can control, including customer-centric merchandising, a timely and accurate supply chain, and in-store execution. Furthermore, Dollar General (NYSE:DG) is working towards its “back-to-basics” progress, enhancing customer experience by increasing employee presence at the front end of its stores and ensuring that its associates provide an increased level of engagement to customers. It is also focusing labor hours on perpetual inventory management in an attempt to facilitate its sales growth and improve in-stock levels.

Dollar General (NYSE:DG) is currently trading at a forward P/E of 14.23 at a 21% discount to its sector. 42 hedge funds hold stakes in the stock as of Q2 2024.

4. Macy’s, Inc. (NYSE:M)

Number of Hedge Fund Holders: 44

Macy’s (NYSE:M) is an omni-channel American retail company that operates department stores such as accessories and apparel for adults and children across the globe. It also operates prominent retail brands such as Bloomingdale’s and Bluemercury, which have been the primary drivers of the company’s growth.

Macy’s (NYSE:M) stock price plummeted after acquisition plans by potential suitors Brigade Capital, an investment management firm, and Arkhouse Management, a real estate investing organization, fell through. Despite the stumble, Macy’s (NYSE:M) is working to maximize profitability by closing down stores across the US with inadequate sales and opening small-format stores in their place. The company plans to open around 30 new small-format stores through 2025.

In the recent quarter, Macy’s (NYSE:M) experienced strength in fragrances and women’s ready-to-wear apparel, including the Steve Madden, Donna Karan, Avec Les Filles, and French Connection brands. High-quality fashion and increased consumer engagement also lead to high public interest in the ongoing private brand ready-wear re-imagination.

The company is also targeting weaknesses in men’s apparel, home, and handbags. In men’s apparel, it is focusing its attention on the contemporary, which it claims to be in a bright spot for growth. Macy’s (NYSE:M) also launched a new private brand that specifically targets customers under 40 in an attempt to elevate consumer engagement. It is also introducing diversity in its handbags collection to grow its portfolio.

Over the past three years, the company’s annual revenue has grown at a CAGR 2.34%. Total Q2 2024 revenue of $5.10 billion also underwent a 1.15% one-year increase when compared to last year. The stock is currently trading at a P/E ratio of 5.68 at a 64% discount to its sector. Macy’s (NYSE:M) median price target of $15.57 presents a 9.18% upside from current levels. 44 hedge funds hold stakes in Macy’s (NYSE:M) as of Q2 2024, with Arrowstreet Capital being the most prominent shareholder with 9.5 million shares. It ranks fourth on our list of the 7 best department store and discount retailers stocks to buy.

3. Target, Corp. (NYSE:TGT)

Number of Hedge Fund Holders: 52

Target (NYSE:TGT) is an American retail giant that operates a chain of discount department hypermarkets and stores, with around 2,000 stores across the US and Canada. It was one of the top-performing stocks in the pandemic, experiencing increasing growth with its Drive Up curbside pickup program. However, the company’s business fell with increasing inflation and changing consumer spending patterns due to high interest rates.

Investors looking for signs of a comeback were pleasantly surprised with Target’s (NYSE:TGT) Q2 2024 earnings report. Comparable sales grew by 2%, and traffic growth increased by 3%. With traffic growth in all six merchandising categories of the company, customers seem to be coming back to Target (NYSE:TGT). Sales in apparel, one of its key categories, rose by 3%. Its discretionary categories comprise a significant portion of its revenue and are also improving.

Target (NYSE:TGT) is trading at a P/E ratio of 16.17 at a 9.30% discount to its sector. Its revenue grew by 2.7% to $25.2 billion, along with several other bottom-line improvements in the most recent quarter. For instance, its earnings per share exceeded analyst estimations of $2.18, going to $2.57. The company also increased its earnings per share guidance from $8.60-$9.60 to $9.00-$9.70. In addition, Target’s (NYSE:TGT) net income grew by 26.54% since last quarter and 48.85% since last year.

It sports a consensus Buy rating among analysts, with its median price target of $153 presenting an upside of 17.17% from current levels. As of Q2 2024, Target (NYSE:TGT) is held by 52 hedge funds, with Diamond Hill Capital holding the highest stake worth $458.13 million. It ranks third on our list of the 7 best department store and discount retailers stocks to buy. Carillon Eagle Growth & Income Fund stated the following regarding Target Corporation (NYSE:TGT) in its Q2 2024 investor letter:

“Target Corporation’s (NYSE:TGT) sales continue to feel the consumer softness in discretionary goods. In addition, while margins are recovering, they are not up to expectations. Encouragingly, sales are sequentially increasing and comparable sales are expected to get easier as Target enters the back half of the year.”

2. Costco Wholesale Corp (NASDAQ:COST)

Number of Hedge Fund Holders: 71

Costco (NASDAQ:COST) is a Washington-based retail company specializing in a wide array of products for its consumers and ranks second on our list of the 7 best department store and discount retailers stocks to buy.  It currently operates around 878 warehouses, and plans to open 28 new stores in 2024 across the globe, with most of them being in the US.

Costco (NASDAQ:COST) has maintained a steady business throughout the years. One of the primary reasons behind the company’s continuous growth is its operation sector. It functions in a sector poised to withstand economic turbulence and is likely to see an increase in revenue and memberships as it continues to grow. In addition, Costco (NASDAQ:COST) is leveraging the shift to online shopping, offering convenience and a wide variety of competitively priced products. It underwent a 21% growth in its ecommerce business in the last quarter. 

The company is traversing a positive trajectory in terms of its financials. Last quarter saw a 9.1% year-over-year revenue growth. While growth was strong in the US, it was even promising internationally, with same-store sales growing 8.5% year-over-year (adjusted for gasoline prices). Costco’s (NASDAQ:COST) international growth potential appears strong. For instance, customers saw a five-hour wait to enter the company’s recently opened store in Okinawa Japan on its first day. Costco also increased its premium membership fee from $120 to $130 a year.

Costco (NASDAQ:COST) sports a consensus Buy rating among analysts, with its median price target of $892 implying an upside of 4.88% from current levels. The company’s sales are growing in Q3 2024, primarily due to merchandising of high-quality items that resonate with members. Members are also purchasing more core merchandise and discretionary items, and bakery sales are thriving as well.

ClearBridge Sustainability Leaders Strategy stated the following regarding Costco Wholesale Corporation (NASDAQ:COST) in its Q2 2024 investor letter:

“Consumer staples holdings were also standouts in the quarter, such as Costco Wholesale Corporation (NASDAQ:COST), which continues to execute well and delivered better than expected earnings, helped by strong traffic driving better expense leverage. Customers also looked to be shifting toward more discretionary purchases.”

1. Walmart, Inc. (NYSE:WMT)

Number of Hedge Fund Holders: 95

Walmart (NYSE:WMT) is the largest brick-and-mortar retailer across the globe, operating a chain of discount department stores, grocery stores, and hypermarkets. To put its size into perspective, Walmart (NYSE:WMT) operates around 10,600 stores around the world, with more than 50% of them located outside the United States in 23 other countries. Target (NYSE:TGT), in contrast, has around 2,000 stores, while Kroger has 2,750.

While Walmart’s (NYSE:WMT) sheer size offers it a distinct competitive advantage, there are several other positive reasons behind the stock ranking first on our list of the 7 best department store and discount retailer stocks to buy. It has created a vast retail “omnichannel” with its subscription-based Walmart+ program, which reported a 14.4% year-over-year growth in its membership income. This omnichannel alone was the cause behind a 22% year-over-year growth in Walmart’s (NYSE:WMT) e-commerce revenue in the last quarter.

Walmart (NYSE:WMT) also started appealing to high-income households when inflation started soaring in 2021. Although inflation has started to fall, the company is likely to retain its new customers since it has started adding higher-end brands to its portfolio. For instance, Chaps and Reebok are recent premium additions to the company’s apparel lines, and so are premium wines. Walmart (NYSE:WMT) stores previously looked like warehouses, but the company has now changed this by offering theme-based and seasonal visual presentations.

In addition, the company is expected to remain resilient despite potential economic turbulences, primarily because more than half of its revenue is related to grocery. Regardless of the economic environment, people must eat, after all. It is also poised to withstand challenges, since 25% of its sales come from general merchandise, including office supplies, light bulbs, kids clothing, towels, socks, and the likes.

95 hedge funds hold stakes worth 9.19 billion as of Q2 2024. It sports a consensus Buy rating from analysts, with its median price target presenting an upside of 4.88% from current levels.

Overall, WMT ranks first among the 7 best department store and discount retailer stocks to buy now. While we acknowledge the potential of department store and discount retailer companies, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than the stocks that are mentioned on our list but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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