Overview of Recent Consumer Buyer Trends and the Retail Sector
On September 18, the Fed cut interest rates for the first time since the Covid-19 pandemic, slashing the benchmark rate by half a percentage point. This brought to a range between 4.75% and 5%. The adjustment aims to relieve consumers and businesses suffering from high borrowing costs and protect the labor market, which was showing signs of slowing. This strategic move by the Fed is interpreted as a sign of relaxation against inflation and a welcome change for businesses and consumers.
Although the impact of the lower interest rates is expected to be substantial, it will likely take time to make its way through the economy. The prospect has, however, strengthened confidence in Americans that inflation will continue to cool, paving the way for good days ahead. According to research by BCG, consumer confidence is already recovering, albeit slowly, across the world and in the US. With people increasingly believing that their personal finances are improving, the sentiment is likely to continue on an upward trajectory if circumstances do not change.
A recent survey by the Center for Customer Insight (CCI) suggests that the extent to which increasing consumer confidence will translate into increasing consumer spending is likely to vary across markets and product categories. The survey reported that the percentage of respondents with personal finance concerns dwindled from 39% in 2023 to 26% in 2024. These trends are significant for retailers, as the financial health of consumers in the country affects the categories and services they prioritize when spending money.
The Future of the Retail Sector
According to the WTW Global Retail Survey for 2024, around 52% of retailers this year expect increased profitability in the coming two years. In addition, approximately 48% of retailers are looking to leverage artificial intelligence in their operations to offer their customers a personalized and efficient shopping experience. However, with more and more businesses turning towards AI, around 43% of the respondents voiced concerns about high cybersecurity risks likely to arise with increasing reliance on new technologies. Despite the risks, a majority of retailers are incorporating AI into their operations, streamlining and expediting their functioning.
On June 24, Simeon Gutman, an analyst at Morgan Stanley, joined CNBC’s “The Exchange” to discuss the impact of tech and AI on retailers and how these companies are leveraging technology to boost profit margins. Here is what to say about retail companies in this respect:
“Walmart’s the one that comes to mind the first…, you’re hitting the nail on the head with several of these aspects of tech diffusion, and on top of it, they’re gaining market share in terms of tech diffusion. AI is easily one of them, big scale, lots of data, a lot of opportunity to go through their data and enhance both the frontend of their business, drive more sales to customers, make things easier, and improve the backend.”
According to Gutman, big-box retailers are taking the lead in infusing tech and AI into their internal operations, increasing profit margins and streamlining operations. Such innovative trends may allow the retail industry to bounce back in the market, taking the lead and leading the change.
Our Methodology
We first consulted stock screeners from Finviz and Yahoo Finance, along with online rankings, to create an initial list of 15 publicly traded retail companies with a forward P/E ratios of less than 23 (the broader market is trading at a forward P/E of 23, as per data from WSJ). From this list, we selected the 10 stocks with the highest analyst upside potential as of September 23, 2024, and used that as our ranking metric.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
10 Cheap Retail Stocks to Buy According to Analysts
10 Cheap Retail Stocks to Buy According to Analysts
Analyst Upside Potential as of September 23, 2024: 20.21%
Number of Hedge Fund Holders as of Q2 2024: 26
Office Depot (NYSE:ODP) provides business supplies, services, products, and digital workplace technology solutions to small, medium-sized, and enterprise businesses. Its operations are divided into four segments: ODP Depot Division, ODP Business Solutions Division, Varis Division, and Veyer Division. The Office Depot Division provides retail consumer and small business products and services through an omnichannel platform. The ODP Business Solutions Division sells the company’s privately branded and nationally branded office supplies and adjacency products and services to customers. The Veyer Divison specializes in B2B and consumer business service delivery, with fulfillment, distribution, purchasing, and global sourcing. Office Depot’s Varis Division encompasses a B2B-centric digital commerce platform that offers businesses the procurement controls and visibility required to operate.
The company is expediting several initiatives based on its performance in Q1 2024 to combat the ongoing macroeconomic headwinds it is facing. Such endeavors are positioning the company to drive greater revenue velocity exiting 2024. It is also focusing on strategically transforming its top line growth trajectory in its core business. Office Depot (NYSE:ODP) is driving business transformation, and AI process focus across its entire enterprise to benefit from productivity opportunities to fuel future growth and boost capital allocation opportunities. It also made substantial progress under its Project Core, which was aimed at streamlining its operations and sharpening its core focus.
Office Depot (NYSE:ODP) recently began its five major business process improvement initiatives, known as the Big 5. These initiatives are expected to drive significant growth and profitability in 2025. It is also engaging in partnerships to drive additional traffic to its retail division. Apart from investments in its core operations, the company repurchased a significant amount of shares, amounting to more than $140 million of stick in this quarter. This also includes more than $170 million under the recently announced authorization. The company is continuing to balance its capital allocation strategy, keeping market conditions and business performance in check.
With several initiatives in place, the company is on track to achieve annualized run rate savings of at least $100 million when implemented completely. This will help solidify its position for future growth, giving it a competitive edge. Office Depot (NYSE:ODP) is managing these savings through cost-efficiency measures undertaken across the entire enterprise, including its supply chain, organizational structure, and cost of goods sold savings through further efficiencies.
Overall, ODP ranks fourth among the 10 cheap retail stocks to buy according to analysts. While we acknowledge the potential of ODP as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ODP but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.