Before Buying Walmart Stock, 3 Discount Retail Stocks I Would Buy Today

Investors have good reasons to like Walmart (NYSE:WMT)First, it’s the world’s largest retailer, with trailing 12-month revenue of nearly $650 billion. Its more than 10,600 stores sell everything from groceries to home furnishings to auto parts.

In short, investors can always expect consumers to visit Walmart—it sells just about everything, and its large stores are conveniently located to serve communities across the country. In other words, this isn’t a business that investors need to worry about.

Here’s another positive: Walmart’s e-commerce business now Annual turnover reaches US$100 billionHaving a digital platform of this size allows the company to grow its advertising business, which will be a significant driver of profits in the coming years.

That said, Walmart stock can now be criticized from an investment perspective. Looking at the stock’s valuation from multiple angles, this is one of the most inopportune times to buy in the past decade.

Walmart’s Price to sales ratio (P/S) Hitting a 10-year high, with a P/E ratio higher than the industry average S&P 500 IndexThe company’s dividend yield is also at a 10-year low.

WMT PS Ratio Chart

WMT PS Ratio Chart

Therefore, I want to highlight three other discount retail chains that I prefer to Walmart as current investment opportunities: Orly’s Discount Stores Holdings (NASDAQ: OLI), Five or less (NASDAQ: V)and Dollar General (NYSE: DG).

1. Orite Trading Store

The earnings growth trend is driving the share price higher, which is good news for Ollie’s shareholders. The pandemic has hit corporate profitability, caused supply chain issues and increased labor expenses. But Ollie’s rebounded in 2023, with operating income increasing significantly by 74%, and future growth seems possible.

Ollie’s plans to open 48 new stores in 2024, which is a good increase from the 512 stores at the end of 2023. Considering management just raised its long-term goals, investors can expect rapid new store openings for some time. to 1,300 stores.

Ollie’s profit margins have historically remained stable as it has grown. This is a good reason to believe management has control of the business and can maintain strong profitability as it expands. Therefore, with hundreds of new stores in the pipeline, I expect Ollie’s to see higher profits, causing the stock price to rise.

2.Five or less

Five Below’s investment thesis is similar to Ollie’s: The company has profitable stores and plans to open more, providing investors with earnings growth and upside. The difference between the two, however, is that Five Below has a more targeted (and aggressive) timeline.

By the end of 2023, the number of “Five Below” stores will exceed 1,500. But management plans to have more than 2,600 stores by the end of 2026 and more than 3,500 stores by the end of 2030.

Keep in mind that Five Below is completely debt-free because it costs relatively little to open a new store and has a payback period of just one year. Think of it like a cash flow snowball rolling downhill. The company is profitable and uses cash to open new stores. These stores quickly recoup their costs and their cash flow snowballs.

The good news for investors right now is that Five Below stock is down about 16% year to date, giving investors a better entry point for long-term investing.

3. Dollar General

While business at Walmart, Ollie’s and Five Below is booming, Dollar General is also facing some problems. On one hand, its revenue is at an all-time high, driven by same-store sales growth at new and existing stores. Its diluted earnings per share (EPS) declined in 2023 and is expected to decline again in 2024.

DG Revenue (TTM) ChartDG Revenue (TTM) Chart

DG Revenue (TTM) Chart

The silver lining is that Dollar General is still seeing plenty of consumer demand and remains profitable. Therefore, the business is salvageable. Management just needs to identify the problems that are driving down profits and fix them.

In fact, Dollar General already knows that the key issue is suboptimal inventory management and is working to correct it. Based on management guidance, the turnaround will not be completed this year. But I believe it will happen sooner or later, and the company’s earnings will grow astoundingly over the next few years.

In the meantime, those who buy Dollar General stock today can earn rewards while they wait. Unlike Ollie’s or Five Below, Dollar General stock pays dividends. The yield is higher than Walmart – another reason to choose Dollar General. It’s expected that Dollar General stock may increase its dividend again in 2024, as it has for eight consecutive years.

All in all, I understand why investors like Walmart stock, but it’s not necessarily a good value right now. Therefore, for investors who prefer the discount retail space, Ollie’s, Five Below, and Dollar General offer better opportunities for profitable growth. I think I will buy the stocks of these three companies today, and then buy the stocks of Walmart.

Should you invest $1,000 in Five Below right now?

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Jon Quast The Motley Fool has positions in Dollar General and Five Below. The Motley Fool has a position in and recommends Walmart. The Motley Fool recommends Five Below and Ollie’s Bargain Outlet. The Motley Fool has disclosure policy.

Before Buying Walmart Stock, 3 Discount Retail Stocks I Would Buy Today Originally published by The Motley Fool

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