Buy discount retailer stocks to capture this consumer trend

Value-conscious shoppers have been a boon to some discount retailers, while others like Five Below (FIVE) feel the weight of a challenging macro environment. Loop Capital Markets Managing Director Anthony Chukumba joins Market Domination to discuss his top picks in the discount retail sector.

Chukumba characterizes the lower-income consumer's current position as a "tough place": these consumers are working, given the market's low unemployment, but they are "stressed" by having to pay more for everything from rent to groceries. This means they are being more selective in terms of what they're buying, avoiding the discretionary items on which retailers make higher profit margins, Chukumba says.

The strategist outlines why discount retailers such as Ollie's Bargain Outlet (OLLI) and Dollar Tree (DLTR) earned Buy ratings from Loop Capital Markets.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

Video Transcript

As shoppers feel the pants from inflation pressures, discount stores battle it out to entice consumers, wallets, customers looking for budget friendly prices has been a tailwind for some retailers.

While others like five below feel the weight of a challenging macro environment.

We're looking at how to navigate the big picture with the Yahoo finance playbook, Anthony Cumba Loop capital Markets managing director is joining us now for more.

Anthony.

It's always great to see you.

Thanks for being here.

So thanks for having me.

So let's let's talk about the big picture for sort of the core consumer for discounters.

First of all, because typically we're talking about lower income consumers, although sometimes other folks trade down there.

So kind of how would you characterize that consumer right now?

And how is that playing out with some of these discounters?

The low income consumer is in sort of a tough place right now.

On the one hand, they are working, right, unemployment is still very low and we're still seeing a very good wage growth, but they're stretched, they are awfully stretched, right?

They're paying more for rent, they're paying more for groceries, they're paying more for gas and so, you know, look, they're still spending but they're being more selective in terms of what they're, they are buying, they're looking more for value and they're concentrating their purchases much more on must haves.

Right.

Think consumable products.

Think food, uh, cleaning supplies, uh, health and beauty care items and much less on, you know, nice to haves.

In other words, discretionary items.

And unfortunately for retailers, they much, they make much higher profit margins on those discretionary items than they do on consumable items.

And Anthony, how does this translate into your view on any companies within the sector who do you like?

Because I'm looking at our Wi Fi interactive heat map of discount retailers here, Ali Arlys Ollie's Bargain Basement up 11% on the year, everything else in the red, some of it by quite a bit, we got Dollar Tree down 20% big lots down 63.

And although it matters more than the p the share price.

So what do you like in some of these companies?

So we have, uh, buy ratings on two of these companies right now.

Uh, specifically Ali's, which as you said, is a year to date.

Um, Outperformer, uh, and also Dollar Tree, which is more challenged, but it's a kind of a special situation.

So with Ali's, I mean, they are clearly benefiting from higher income consumers trading down to their stores and their stores.

It's, it's very much a treasure hunt environment.

Um you know, just significant discounts relative to other national retailers, even if you're talking about Walmart.

Um, they've got this Ali's Army where, you know, basically they have a very, very large uh customer loyalty program.

You know, those folks account for 80% of their sales.

They do a lot of great direct mar marketing to them.

Um So they're really hitting on all cylinders right now.

Dollar Tree is a little bit of a different situation.

They've continued to have problems with Family Dollar, uh which is a chain that they acquired back in 2014.

Probably never should have acquired them quite frankly.

And that's where the difficulty is in their business.

But the reason I'm optimistic about Dollar Tree is they just announced yesterday, um that they are, um you know, considering strategic alternatives for family dollar ie they're looking to sell family dollar and quite frankly, they could sell family dollar, a bag of magic beans.

It would be wonderful for their business.

I, I estimate that, I mean, literally they can get almost nothing for, for family dollar, but just getting rid of, you know, that albatross and also getting rid of those leases.

You're probably talking about 100 and 70 100 and $80 stock.

A classic, be careful what you wish for situation.

I, well remember when they were battling with Dollar General over that asset and they, they won it, I guess Anthony, I put that in air quotes.

Um So one of the things that you point out in your research that I thought was really interesting is that most of these so called discounters actually price at a little bit of a premium in terms of the products in their stores to the likes of a Walmart.

Right?

But maybe there's the convenience factor that works in their favor.

But right now is Walmart gonna take significant market share from them?

So, you know, our, our latest, um, deep discounters pricing study, I believe the title was something to the, uh, to the effect of, you know, deep discounters have 99 problems, but Walmart's pricing is not one.

Right.

In other words, they don't have to be at price parity with Walmart, um, largely because they're just much more convenient, uh, you know, relative to Walmart.

Right.

In other words, the Dollar general, it's going to be in your name neighborhood.

Uh, you can park right in the front of the store.

It's an 17,000 square foot store.

You can get in and out pretty quickly.

And most of those shopping trips are kind of a midweek shopping trip where you're looking to spend like 10 $15.

Contrast that with Walmart.

Are you gonna save a little bit of money by going to Walmart?

Absolutely in terms of the products, but you're going to drive like, you know, 20 minutes a half an hour, you're gonna park way, you know, a couple of 100 yards from the, from the front entrance.

If you're lucky, you're gonna navigate a 200,000 square foot store.

Now, all that's worth it.

If you're making your weekly or biweekly shopping trip where you're spending $100 200 dollars, not worth it if you're only going to spend like 10 $15.

So, I do not believe on the list of issues that the dollar stores are having right now.

I don't think Walmart makes the top five.

I'm not even sure if they make the top 10 Anthony.

I wanna switch gears a little bit.

Uh And we're gonna stick with retail retail here.

I understand that you have some opinions about gamestop and just some of the incredible volatility we've been talking about here today.

More halts, more increases in share price.

We got Rory Kitty speaking tomorrow.

What do you think about all of this?

You know, and, and the infamous words of uh of I believe it's Al Pacino and Godfather three every time I get out, they drag me back in.

So, so here we are like we went back in the time machine, it's whatever, 2020 2021.

I mean, you know, look, I'm gonna keep this very simple.

Ok. Um Heath Gill is a fraud and he needs to be investigated.

The fact that this individual bought short dated call options on gamestop and then tweeted for the first time in forever knowing full well, that, you know, these Reddit, um, you know, Wall Street bet folks would then drive the stock price up.

I, I mean, it's, I, you know, look, I'm not a lawyer.

I don't play one on TV, but it is shady.

A f, as the kids say.

Um, and, you know, and, and at the, the day, like all that's happened in the time since, you know, since 2020 2021 is Gamestop's business is getting gotten worse and worse and worse.

Right?

I mean, you know, look at, look at the most recent news, right?

Microsoft will be coming out with Call of Duty on Game Pass Day and date when they first come out with that, you know, with that title.

Right.

In other words, you, you don't have to go and buy the actual game, you can now play it on game pass.

I mean, that is, that is ruinous for stops business.

Anthony isn't all of that kind of beside the point though.

I mean, you know, I, I, and maybe it wasn't originally, right, because Keith Gill originally did make a fundamental case for the star, which now all he's doing is posting memes.

But, you know, for the people who follow him, is it because they really think that Gamestop is such a great comedy or because it's kind of fun to do the whole thing.

I, I don't know Julie, what, what are we talking about here?

We're talking about memes.

Ok.

I, I didn't go to Harvard Business School to try to interpret memes.

It's just not a thing.

Right.

I mean, you know, look, I, I, I'll come back to what I've been saying for years.

First off, it's wonderful that younger people, uh, are getting involved, the stock market.

It's a way to build wealth over time.

That is wonderful.

I applaud that, but there's investing and then there's this, I, I would call it gambling.

I'm not, I think that's at this point, an insult to gambling and, and it really makes me very uneasy when individuals like Keith Gill have figured out how to game the system.

No pun intended and take advantage of these individuals.

That, to me, that's what it comes down to.

I mean, we can have a debate about what is Gamestop worth, this is Gamestop Worth, that is Gamestop worth this other thing.

But when individuals are, you know, doing things like this, it just makes me really, really uncomfortable and quite frankly, I feel sorry for these individual investors, uh, who are just being taken to the cleaners.

Is there what I mean?

What is it?

I don't even know what to say, Anthony.

I mean, like, you know, there, there is this excitement, there is this sort of cult of personality obviously around Keith Gill.

But like, I, I don't know, are we taking it too seriously?

I, I guess I, I mean, people are, I'm sure people lost money.

You know, the, the last time this happened, I'm sure they're gonna lose money this time.

But, you know, is it, it's kind of, as you say, it's kind of on them.

I don't feel sorry for them.

They should, they know what they're getting into.

No.

I mean, you know, I mean, that's a bigger philosophical discussion.

Right.

It's fun until it's not fun.

Right.

It's fun until, you know, basically you, you, you buy a bunch of stock on margin and now you can't make your mortgage payment, you can't make your rent payment, you can't make your car payment, right?

And, and, and we always talk about, you know, the folks that, you know, make a lot of money from this like Keith Gill, like we don't talk about that individual, you know, who loses a bunch of money and suddenly they can't put food on the table, right?

And, and at the end of the day, like, yeah, I guess buyer beware, but it just makes me uncomfortable that there are, you know, there are the haves and the have nots and it's gotten to a point where the HS Keith Gill Ryan Cohen are taking advantage of the have nots and I know I'm gonna get on, we gotta go, we gotta go Anthony, I can keep, I mean, the haves or haves nots.

I mean, isn't that the story of Wall Street Writ large?

And this is just some guy I, I don't know we had to leave all the to be continued to be continued.

I was gonna say we'll, we'll say that for dumb money too.

OK?

We'll put that in production, Anthony.

Appreciate all of your insights and all your commentary here.

Thank you.