Rising inflation levels and elevated interest rates are strongly impacting consumer spending. However, the retail industry is poised for solid growth in the long run, driven by evolving consumer preferences, technological advancements like AI and ML, and the growing popularity of online shopping.

Given this backdrop, it could be wise to avoid investing in fundamentally weak retail stocks Grocery Outlet Holding Corp. (GO), Dollar Tree, Inc. (DLTR), and Dollar General Corporation (DG) in May.

As persistent inflation and higher interest rates made taking on debt more burdensome, retail spending in the US paused unexpectedly in April. Retail sales were unchanged last month and followed a slightly downwardly revised 0.6% in March. They showed a 3% increase unadjusted year-over-year, against a 3.8% rise in March.

However, the retail industry is transforming with changing consumer preferences and technological developments. The industry is expected to grow at a CAGR of 7.6% during the forecast period (2024-2029), resulting in a volume of $47.24 trillion by 2029, driven by the emerging e-commerce trends forcing enterprising to innovate and transition toward multichannel retailing.

According to recent industry calculations, the US will rank first among 20 countries worldwide in retail e-commerce development between 2024 and 2028, expanding at a CAGR of 11.8%. By 2026, the US online retail market value will likely surpass the trillion US dollar mark.

Moreover, online retail sales in the US grew 7% between January and April 2024, as per an Adobe Analytics report, driven by solid demand for groceries and cheaper discretionary items.

IMARC Group projects the global online grocery market to reach $ 5.53 trillion by 2032, exhibiting a CAGR of 29.3% during 2024-2032. The market demand is fueled by the growing reliance on smartphones, rising utilization of AI and ML for personalized shopping experiences, increasing convenience needs, and secure payment gateways.

Moreover, investors’ interest in retail stocks is evident from the SPDR S&P Retail ETF’s (XRT) 27.4% returns over the past year.

Given these market trends, let’s look at the fundamentals of the three Grocery/Big Box Retailers stocks, beginning with the third one.

Stock #3: Grocery Outlet Holding Corp. (GO)

GO is a retailer of consumables and fresh products sold through independently operated stores. Its stores offer products in various categories, like dairy and deli, produce, floral, fresh meat, seafood, grocery, general merchandise, health and beauty care, frozen food, beer and wine, and ethnic products.

On April 2, GO acquired United Grocery Outlet, an extreme value discount grocery retailer, from affiliates of Gen Cap America, Inc. The acquisition of UGO will expand GO’s presence into Tennessee, North Carolina, Georgia, Alabama, Kentucky and Virginia through 40 stores and a distribution center.

In terms of forward EV/EBITDA, GO is trading at 14.24x, 33.1% higher than the industry average of 10.70x. Likewise, the stock’s forward non-GAAP P/E multiple of 24.86 is 38.3% higher than the industry average of 17.97. Also, its forward Price/Cash Flow of 13.28x is 8% higher than the industry average of 12.30x.

GO’s trailing-12-month gross profit margin and net income margin of 30.81% and 1.60 are 13.1% and 67.7% lower than the respective industry averages of 35.45% and 4.95%. Also, the stock’s trailing-12-month ROCE of 5.50% is 51.1% lower than the industry average of 11.25%.

For the first quarter that ended on March 31, 2024, GO reported net sales of $1.04 billion. Its operating income decreased 98.3% from the prior year’s quarter to $563 thousand. The company’s net loss and comprehensive loss and net loss per share were $1.02 million and $0.01 for the quarter, respectively.

Analysts expect GO’s EPS for the second quarter (ending June 2024) to decrease 36.8% year-over-year to $0.20, and its revenue for the ongoing quarter is expected to be $1.10 billion. For the fiscal year 2024, the company’s EPS is expected to decline 13.5% year-over-year to $0.93.

GO’s stock has declined 20.8% over the past six months and 23.6% over the past year to close the last trading session at $22.84.

GO’s bleak outlook is reflected in its POWR Ratings. The stock has an overall rating of D, translating to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

The stock has an F for Sentiment and a D for Growth. Within the A-rated Grocery/Big Box Retailers industry, GO is ranked #36 among 36 stocks.

Click here to access additional ratings of GO (Quality, Stability, Momentum, and Value).

Stock #2: Dollar Tree, Inc. (DLTR)

DLTR operates retail discount stores. It operates in two segments: Dollar Tree and Family Dollar. The Dollar Tree segment provides merchandise at a fixed price of $1.25. It offers consumable merchandise such as everyday consumables, like household paper and chemicals, food, candy, health, personal care products, and frozen and refrigerated food.

On May 7, DLTR collaborated with Ibotta Performance Network, the first digital network that delivers coordinated promotions across retailer platforms. The partnership aims to advance Family Dollar’s digital engagement and customer experience to drive more customer value and loyalty. It will help customers do more through its Smart Coupons program.

In terms of forward non-GAAP P/E, DLTR is trading at 16.51x, 8.1% lower than the industry average of 17.97x. However, the stock’s forward EV/EBITDA multiple of 11.32 is 5.9% higher than the industry average of 10.70. Also, its forward EV/EBIT of 16.75x is 13.2% higher than the industry average of 14.80x.

DLTR’s trailing-12-month gross profit margin and EBIT margin of 30.77% and 5.87% are 13.2% and 36.8% lower than the respective industry averages of 35.45% and 9.29%.

For the fourth quarter that ended February 3, 2024, DLTR’s total revenue increased 11.9% year-over-year to $8.64 billion. However, its operating loss came in at $1.89 billion, against an operating income of $618.10 million during the prior year’s quarter. The company reported a net loss of $1.71 billion for the quarter.

Analysts expect DLTR’s revenue for the first quarter (ended April 2024) to increase 4.7% year-over-year to $7.67 billion. However, its EPS is expected to decline 2.3% year-over-year to $1.44 over the same period. Also, the company missed the consensus EPS estimates in three of the trailing four quarters, which is disappointing.

Over the past month, the stock has declined 6.9% and 28.9% over the past year to close the last trading session at $113.77.

DLTR’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall grade of C, translating to a Neutral in our proprietary rating system.

DLTR has a C grade for Value, Quality, Sentiment, Growth, and Stability. It is ranked #34 among 36 stocks within the A-rated Grocery/Big Box Retailers industry.

To see the other ratings of DLTR, click here.

Stock #1: Dollar General Corporation (DG)

DG is a discount retailer which provides various merchandise products. It offers consumable products, including paper and cleaning products, packaged food, and perishables products. The company's consumable products also comprise snacks, health and beauty products, pet supplies and pet food, and tobacco products.

In terms of forward EV/Sales, DG is trading at 1.19x, 28.8% lower than the industry average of 1.67x. However, the stock’s forward EV/EBITDA multiple of 14.80 is 38.3% higher than the industry average of 10.70. And its forward Price/Book of 3.92x is 38.2% higher than the industry average of 2.84x.

DG’s trailing-12-month gross profit margin of 30.29% is 14.4% lower than the industry average of 35.39%. Likewise, the stock’s trailing-12-month EBIT margin and net income margin of 6.34% and 4.29% are unfavorably compared to the industry average of 9.29% and 4.95%, respectively.

For the fourth quarter that ended February 2, 2024, DG reported net sales of $9.86 billion. Its gross profit decreased 7.7% year-over-year to $2.91 billion. The company’s net income and EPS came in at $401.81 million and $1.83, down 39% and 38.2% from the prior year’s quarter, respectively.

For the first quarter that ended April 2024, analysts expect DG’s revenue to grow 5.9% year-over-year to $9.90 billion. However, the company’s EPS is expected to decrease 32.6% year-over-year to $1.58 for the current quarter.

DG’s stock has gained 13.3% over the past six months to close the last trading session at $141.55. However, the stock has lost 33.2% over the past year.

DG’s POWR Ratings reflect its mixed prospects. The stock has an overall rating of C, which equates to a Neutral in our proprietary rating system.

DG has a C grade for Value, Quality, Sentiment, and Stability. It is ranked #33 among 36 stocks in the same industry.

In addition to the POWR Ratings I’ve just highlighted, you can see DG’s ratings for Growth and Momentum here.

What To Do Next?

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DG shares were trading at $141.08 per share on Thursday afternoon, down $0.47 (-0.33%). Year-to-date, DG has gained 4.61%, versus a 11.98% rise in the benchmark S&P 500 index during the same period.

Rajkumari started her career as a writer but gradually shifted her focus to financial journalism, leveraging her educational background in Commerce. Fascinated by the interplay of business and economic shifts in equities, she aspires to evolve as an analyst. With a knack for simplifying complex financial concepts, her mission is to empower investors with insights that lead to profitable decisions.

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