Price-conscious shoppers have been a boon for some discount retailers, but others like Five Below (FIVE) are feeling the strain of a tough macro environment. Anthony Chukumba, managing director at Loop Capital Markets, joins Market Domination to talk about stocks to watch in the discount retail sector.
Chukumba describes the current situation as “tough” for lower-income consumers. With low unemployment in the market, these consumers are working, but are feeling “stressed” by higher expenses on everything from rent to groceries. That means they’re being more careful about what they buy, avoiding discretionary items where retailers have higher profit margins, Chukumba said.
Strategists explain why discount retailers like Ollie’s Bargain Outlet (OLLI) and Dollar Tree (DLTR) have earned buy ratings from Loop Capital Markets.
For more expert insights and the latest market trends, click here to watch this entire episode of Market Domination.
Video Transcript
Customers’ appetite for affordable prices is a boon for some retailers as discount stores compete to attract consumers and their wallets as shoppers struggle with inflationary pressures.
Meanwhile, the following five companies are feeling the strain of a tough macro environment.
We’re looking at how to use the Yahoo Finance playbook to get the bigger picture, and Anthony Cumba, Managing Director at Loop Capital Markets, joins us to share more.
Anthony.
It’s always nice to meet you.
Thanks for coming.
So, thank you for inviting me.
So let’s talk about the big picture of the discounter’s core consumer.
First of all, because we are usually talking about low-income consumers, although sometimes other people also trade there.
So how would you characterize that consumer at this point?
And how is that working for some of these discount stores?
Low-income consumers are in some ways struggling right now.
On the one hand, they’re working. Unemployment is still very low, wage growth is still very good, but they’re struggling. They’re struggling terribly.
They’re paying more for rent, groceries, gas, etc. That means that while they’re still spending money, they’re being more selective about what they buy, looking for more value, and focusing on buying essentials.
right.
Think about consumables.
Think food, cleaning supplies, health and beauty products, etc. And don’t think too much about nice-to-have items.
In other words, it is a discretionary item.
And unfortunately for retailers, they make much higher profit margins on discretionary items than they do on consumables.
Anthony, how does this reflect on your views of your favorite companies within the industry?
I’m looking at a Wi-Fi interactive heat map of discount retailers here, and I see that Ali Arlys Ollie’s Bargain Basement is up 11% year over year, the others are all in the red, some of them quite significantly, Dollar Tree is down 20%, Big Lots is down 63.
And that’s more important than the stock price.
So what do you like about these companies?
That means I currently have buy ratings on both of these companies.
Well, specifically, Ali’s, but as you said, it only started this year.
Well, Outperformer, and Dollar Tree are in a tougher situation, but it’s kind of a unique situation.
So, in Ali’s case, they are clearly benefiting from higher-income consumers coming to buy from their stores and their stores.
It’s truly a treasure hunt environment.
Well, you know, even though we’re talking about Walmart, they have huge discounts compared to other national retailers.
Well, they have a company called Ali’s Army and they basically have a very large customer loyalty program.
You know, these people make up 80% of our sales.
They have a lot of great direct marketing going on with them.
Well, they’re really trying their best right now.
The situation is a little different for Dollar Tree.
They continue to have issues with Family Dollar, the chain they acquired in 2014.
Frankly, I probably should never have gotten one.
And that’s the difficulty of their business.
But the reason I’m optimistic about Dollar Tree is because they announced yesterday that they’re looking at strategic alternatives to Family Dollar, which means they’re looking at selling Family Dollar and, frankly, potentially selling magic bags of beans at Family Dollar.
That would be great for their business.
My guess is, literally, you get very little out of your family’s money, but you just have to take that burden off and take the lease off.
Maybe we’re talking about stocks that are $100 and $70, or $100 and $80.
Typical, be careful what you wish for.
I remember very well when they were fighting Dollar General for that asset, and they won it, Anthony, I put that in air quotes.
Well, one of the things that you point out in your study that I thought was really interesting is that most of these so-called discount stores price items in their stores just a little bit higher than a place like Walmart.
right?
But perhaps the convenience factor works in their favor.
But is Walmart really going to take a significant amount of market share away from them at this point?
So, you know, I think the title of our most recent study on discount store pricing was something like, There are 99 problems with discount stores, but Walmart’s pricing isn’t one of them.
right.
In other words, it doesn’t have to be as expensive as Walmart, but it’s mainly because it’s so much more convenient than Walmart.
right.
That means there’s a Dollar General in your neighborhood.
Well, you can park in front of the store.
The store is 17,000 square feet.
You can get in and out pretty quickly.
And most of these purchases are more like weekday shopping trips with the intent to spend around $10-15.
Compare that to Walmart.
Are you planning on going to Walmart to save a little money?
That’s true for the product, but it’ll take a 20-30 minute drive and mean parking a few hundred yards from the front door.
If you’re lucky, you’ll get to tour the 200,000-square-foot store.
Now they are all worth it.
If you go on a weekly or bi-weekly shopping trip where you spend $100-200, it’s not worth the trip if you’re only going to spend around $10-15.
Therefore, I don’t believe the list of problems dollar stores currently have.
I don’t think Walmart is in the top five.
I don’t even know if they’d be in the top 10, Anthony.
I want to change gears a bit.
Well, we’ll stick with retail here.
I’m sure you all have some opinions about GameStop and the incredible volatility that we’ve been talking about here today.
More outages mean higher stock prices.
Rory Kitty will be speaking tomorrow.
What do you think about this?
You know, and that infamous line, I think it was Al Pacino and Godfather III, every time I go out there they drag me back in.
So, it was like we got in a time machine and went back to 2020 or 2021.
So, look, I’m going to keep this very simple.
Ok, well, Heath Gill is a con man and needs to be investigated.
This person bought short expiry call options on GameStop and then tweeted about it for the first time in a long time, knowing full well that bettors on Reddit and Wall Street would drive the stock price up.
I mean, I, you know, I’m not a lawyer.
They don’t do it on TV, but it seems suspicious.
As the kids say, f.
Uh, and, you know, like everything that’s happened throughout 2020 and 2021, GameStop’s business has just gotten worse and worse.
right?
I mean, you know, look at the latest news.
Microsoft is set to release Call of Duty on Game Pass Day, the first day the title will be available.
right.
This means you don’t need to buy the actual game, you can now play it on Game Pass.
I mean, it’s devastating to shut down a business.
But Anthony isn’t off the mark in that sense.
I mean, you know, I, I, and maybe not initially, because Keith Gill originally made the radical case for Star, and now all he does is post memes.
But, you know, for the people who follow him, is it really because they think Gamestop is great comedy or is it just because they have fun doing the whole thing?
I-I don’t know, Julie, what-what are you talking about?
I’m talking about memes.
got it.
I didn’t go to Harvard Business School to interpret memes.
It’s not just a thing.
right.
I mean, you know, I, I, I go back to what I’ve been saying for years.
Firstly, it’s great to see younger people starting to get involved in the stock market.
It’s a way to build wealth over time.
That’s nice.
I applaud that, but there is something called investment, and this is what I would call gambling.
I don’t think it’s an insult to gambling at this point and I’m really worried that someone like Keith Gill has figured out how to game the system.
I’m not kidding, I’m going to take advantage of these individuals.
For me, that’s what it all comes down to.
So we can debate what Gamestop is worth, this is what Gamestop is worth, this is what Gamestop is worth.
But when individuals do this it really bothers me and, frankly, I feel sorry for the retail investors who are being duped.
Did you get what I wanted to say?
what is that?
I don’t even know what to say, Anthony.
I mean, you know, there’s an excitement around Keith Gill, a kind of cult of personality.
But guess what, are we taking it too seriously?
So, I think people lost money.
Look, the last time this happened, they were probably going to lose money this time too.
But like you say, it’s kind of up to them.
I have no sympathy for them.
They should, they know what they’re getting into.
no.
So it’s a larger philosophical discussion.
right.
It’s fun until it’s not fun anymore.
right.
Basically, it’s fun buying a ton of stocks on margin and then you can’t make your mortgage payment, you can’t make your rent payment, you can’t make your car payment, right?
And we always talk about people like Keith Gill who are making a ton of money from this, but we never talk about the individuals who are losing a ton of money and suddenly can’t put food on the table, right?
And at the end of the day, yeah, I guess buyer beware, but it’s the haves and have nots that makes me nervous, to the point where Keith Gill, Ryan Cohen at HS, is taking advantage of the have nots, and I know I’m gonna ride, I gotta go, I gotta go, Anthony, I mean, I can keep the haves and the have nots.
I mean, that’s the Wall Street story in a big way, isn’t it?
And this is just man, I don’t know, we had to leave everything behind and carry on with the sequel.
I was going to say that too, for stupid money.
got it?
We’ll put that into production, Anthony.
I appreciate all of your insights and comments here.
thank you.
