3 Discount Stores Crushing It in the Digital Era

Many traditional brick-and-mortar retailers continue to close stores in record numbers amid dwindling foot traffic, years of debt financing, and fierce competition from e-commerce giant Amazon.com, Inc. (AMZN). Sears' Chapter 11 bankruptcy filing in October last year – along with disappointing first quarter earnings from mall anchors J. C. Penney Company, Inc. (JCP) and Nordstrom, Inc. (JWN) – reaffirms how important it is for large retail players to evolve and remain relevant with today's consumer.

“It's a continual challenge for department stores ... to define who they want to be in this new era," Ryan Fisher, a partner at A.T. Kearney, told CNBC. "To me, the pressure is on them in 2019 to push their online and in-store experiences. And many department store operators still have too much bricks-and-mortar space that needs to be 'rationalized,'" he added.

The three discount variety stores discussed below continue to thrive in the digital era as a result of successfully adapting their business models to reflect and capitalize on the changing purchase behaviors of the modern customer. Let's take a look at how each company has reinvented itself to stay at the forefront of the retail world despite a challenging environment.

Walmart Inc. (WMT)

Founded by Sam Walton in 1945, Walmart Inc. (WMT) sells a variety of general merchandise and grocery items through three business segments: Walmart U.S., Walmart International, and Sam's Club. The big-box retailer has evolved itself in several ways. Firstly, it significantly bolstered its digital footprint in 2016 when it purchased internet e-tailer Jet.com for $3.3 billion. The acquisition helped facilitate the successful launch of Walmart's online brands Bonobos and ModCloth. Secondly, the company has emphasized growth by concentrating on less saturated markets, such as India, while scaling back stores in underperforming countries. Finally, in a move to combat Amazon's logistical edge, Walmart has invested in same-day delivery across the United States and transformed some of its stores into distribution centers. As of June 17, 2019, the discount retailer's stock has a market capitalization of $311.36 billion, issues a 2.09% dividend yield, and is trading up 18.23% year to date (YTD).

Walmart shares trended steadily higher between January and May before accelerating in early June to hit a 52-week high at $109.59 in Friday's trading session. The relative strength index (RSI) shows an overbought reading above 70, increasing the probability of some consolidating before the price attempts to continue its upward momentum. Those looking to buy the stock should seek an entry point near $104, where a previous horizontal resistance line now acts as a crucial support area.

Target Corporation (TGT)

With a market value of $44.98 billion, Target Corporation (TGT) operates as a general merchandise retailer in the United States, offering everything from apparel to groceries. It sells its products through 1,844 stores and digital channels, such as Target.com. The Minneapolis, Minnesota-based retail giant has adapted to new-age retail by expanding its delivery options, redesigning many of its stores, and opening in smaller locations such as college towns and urban areas to target cost-conscious consumers. The discount store has also introduced trendy new lines and collaborates with well-known brands. For instance, it recently teamed up with Vineyard Vines to launch a limited-edition summer collection of clothing, accessories, and swimwear. Target stock currently trades at $87.79, offers an enticing 3.18% dividend yield, and is up almost 35% on the year, outperforming the discount stores industry average by 13% over the same period as of June 17, 2019.

Target's stock gapped above the 200-day simple moving average (SMA) on May 22 after the company surpassed analysts' top- and bottom-line projections. Since that time, the price has trended sharply higher to print a 52-week high on Thursday, June 13, at $89.15. Traders should consider buying pullbacks to $82.50, where the price finds support from the April swing high, which roughly lines up with the 38.2% Fibonacci retracement level.

Dollar General Corporation (DG)

Dollar General Corporation (DG) is a discount retailer, providing a wide variety of consumable products across 15,000 stores in 44 states. The $35.05 billion company has remained competitive in today's retail environment by operating smaller stores in rural locations, which keeps costs down and reduces competition from city-domiciled retails giants like Walmart. Furthermore, the Goodlettsville, Tennessee-based company doesn't own its stores, giving it the flexibility to close underperforming locations quickly. Dollar General also has a sizeable line of private-label brands that allow for higher margins due to control over manufacturing costs and pricing. Dollar General stock has a YTD return of 26.11% and pays a 0.94% dividend yield as of June 17, 2019.

Dollar General's stock closed above its late-April swing high on above-average volume after the company topped first quarter earnings expectations on May 30. The price has continued its bullish momentum this month but looks overbought in the short term, with the RSI indicator showing an elevated reading of nearly 75. Traders who want a position in the stock should set a limit order near $127 – an area where the price encounters support from the April peak and 50-day SMA.