3 Retail Stocks to Buy Ahead of Earnings This Week

Looking ahead to the upcoming earnings reports, its hard not to be drawn to the retail industry. The docket includes some of the most intriguing stories of winners in what's become a very unusual shopping environment in 2020. 

Far from flashy, these defensive stocks are all major beneficiaries of the pandemic economy—and are all poised to produce the type of growth not typically seen in the consumer non-cyclical space.

Will Dollar General Reach a New High?

Dollar General (NYSE:DG) reports before the market open on December 3^rd. The consensus EPS estimate is $1.97 which represents 39% year-over-year growth.

The last eight analysts to chime in on Dollar General stock have either reiterated or initiated 'buy' ratings. Earlier this week Wells Fargo and Oppenheimer confirmed price targets of $250 and $240 respectively.

There's good reason to be bullish about the discount retailer. Most of its sales come from the consumables category which includes food, cleaning supplies, and health and beauty products. This makes its roughly 17,000 locations a convenient one-stop for pandemic-driven shoppers.

Unlike its main competitor Dollar Tree which prices all items at $1, Dollar General sells some things for a buck but most merchandise goes for under $10. The higher-priced items are often multipacks and bulk items which makes Dollar General sort of a miniature version of Costco. More importantly, this model opens the company to a broader customer demographic.

Dollar General is riding a six-quarter winning streak of positive earnings surprises. The last two earnings beats have been big including a 28% bottom-line outperformance in Q2 that propelled the stock to a record high.

Today Dollar General stock is not far below its $225.25 all-time high. Some investors are understandably anxious about buying a stock near its peak, but this is one stock that is likely to continue setting new records into 2021.

Pandemic driven demand is likely here to stay for some time. Worsening coronavirus caseloads and stay-at-home restrictions should translate to more consumer stockpiling in the months ahead­—and help Dollar General charge to new heights. 

Is Kroger''s Cost Structure Improving?

Staying in the pandemic shopping aisle, Kroger (NYSE:KR) is also getting set to report this week. When the supermarket operator reports third quarter results pre-market on December 3^rd, the Street will be looking for EPS of $0.66.

Kroger is a relatively low risk buy ahead of earnings not only because it is a defensive stock, but because it remains significantly undervalued. At 10x both trailing and forward earnings, Kroger remains one of the cheapest stocks in the S&P 500.

Granted, traditional supermarket chains typically don't garner high valuations given the razor thin margins and intense competition in the industry. But the recent growth turned in by the company makes it deserving of higher earnings multiple.

Last quarter the company produced 14% top-line growth excluding gasoline sales. Earnings per share were up sharply compared to the prior year and topped the consensus forecast by more than 40%.

Strong digital sales and consumer demand for essential products are the key growth catalysts for Kroger. And while demand may have slowed in the early part of the recent quarter, the resurgence of the virus led consumers back into supermarkets for a second wave of stockpiling in October. This late quarter blitz is what could lead to a sizeable third-quarter earnings beat.

Kroger shares have been weighed down by concerns about rising costs for digital order fulfillment and a high long-term debt balance of more than $12 billion. But cost savings initiatives such as those that are part of the 'Restock Kroger' program hold the potential to spark a turnaround and lead to improved margins and further debt reduction.

Changed consumer preferences in grocery shopping are likely here to stay even as vaccines become available. Kroger is responding well. Aside from building out its online delivery and pickup services, it is looking down the road to the future of grocery business by getting ready for driverless delivery. This puts the diverse grocery and 'combo' store operator is a good position for multi-year growth. Investors should stock up while the stock is cheap.

Is it Too Late to Buy Big Lots?

Big Lots (NYSE:BIG) will be reporting before the market open on December 4^th. Like Kroger, the stock offers an attractive combination of value and growth.

With a forward P/E ratio of just 7x, Big Lots looks like a big bargain. It too is dealing with a higher cost structure related to the pandemic in the form of increased wages and cleaning and PPE expenses. But all things considered management has done a solid job of keeping its longer-term cost reduction plan in focus. In fact, despite the near-term challenges, the three-year program is on pace to exceed its $100 million cost reduction target.

Meanwhile, Big Lots has transformed itself into a retailer that means business. The company's focus on becoming more technology forward is driving strong revenue growth. An improving e-commerce platform, expanded product selection, and customer-friendly in-store experience had turned Big Lots into an unlikely destination for holiday shoppers. Toss in a wider assortment of household essentials and stay-at-home items and its easy to see why the closeout retailer has some sustainable multi-faceted momentum

Unlike Dollar General and Kroger which have had more modest advances in 2020, Big Lots shares have rebounded very sharply off their March 2020 bottom and are up about 80% year-to-date.

Expectations are certainly sky high for Big Lots with earnings per share forecast to more than double in the current fiscal year. But the market is still playing catch up with Big Lots stock price and this may be set to accelerate after what will likely be a third straight stellar quarterly report this week.