As consumer spending surges, the consumer discretionary sector offers promising investment opportunities. The industry represents companies that provide non-essential goods and services, such as home improvement, fashion, and consumer products, which tend to perform well when consumer confidence and spending are high.
Given this backdrop, it could be wise to invest in fundamentally strong consumer discretionary stocks Lowe's Companies, Inc. (LOW), American Eagle Outfitters, Inc. (AEO), and Newell Brands Inc. (NWL) with significant growth potential.
Consumers boosted spending more than expected in April, propelling the economy’s growth prospects for the second quarter. The Commerce Department reported that consumer spending rose 0.8% after gaining just 0.1% in March. Economists polled by Reuters expected consumer spending to increase by 0.4%.
Consumer spending gets a lift from robust wage growth. Wages rose by 0.4% in May and 4.1% year-over-year, surpassing respective estimates of 0.3% and 3.9% increases. Growth projections for the second quarter soar as high as a 2.1% annualized rate, contrasting the 1.3% pace of economic expansion witnessed during the first quarter.
Further, inflation eased slightly, offering some relief for consumers and boosting the performance of the consumer discretionary industry. The Consumer Price Index (CPI) grew 0.3% in April after advancing 0.4% in March and February, indicating that inflation has resumed its downward trend at the beginning of the second quarter.
Considering these encouraging economic trends, let’s delve deeper into the fundamentals of top consumer discretionary stocks: LOW, AEO, and NWL.
Lowe's Companies, Inc. (LOW)
LOW operates as a home improvement retailer. It provides a line of products for construction, maintenance, repair, remodeling, and decorating. It also offers home improvement products, like appliances, seasonal and outdoor living, lawn and garden.
On June 3, LOW became the first home improvement retailer to offer customers an in-store, Apple Vision Pro-powered experience. With the technology, customers can try Lowe's Style Studio™ for Apple Vision Pro firsthand, enabling them to envision and design their dream kitchens using spatial computing and the help of a Lowe's associate.
This breakthrough launch bodes well with LOW’s operations that immerse users in a high-fidelity 3D kitchen environment and enable them to explore, imagine, and bring their unique project to life in minutes.
On May 31, LOW’s Board of Directors declared a quarterly cash dividend of $1.15 per share, payable on August 7, 2024, to shareholders of record as of July 24, 2024. The dividend represents a 5% increase over the company's previous dividend of $1.10 per share.
LOW pays an annual dividend of $4.60, which translates to a yield of 2.11% at the current share price. Its four-year average dividend yield is 1.63%. Moreover, the company’s dividend payouts have increased at a CAGR of 23.3% over the past three years. LOW has raised its dividends for 60 consecutive years.
During the first quarter that ended May 3, 2024, LOW reported net sales of $21.36 billion, and its operating income was $2.65 billion. The company’s net earnings and EPS were $1.75 billion and $3.06, respectively. Further, the company’s cash and cash equivalents stood at $3.24 billion as of May 3, 2024, compared to $2.95 billion as of May 5, 2023.
Street expects LOW’s revenue for the fourth quarter (ending January 2025) to increase marginally year-over-year to $18.69 billion. Its EPS for the same quarter is expected to grow 10.5% year-over-year to $1.96. Also, the company has topped the consensus EPS estimates in each of the four trailing quarters, which is impressive.
Shares of LOW have surged 5.7% over the past six months and 2.2% over the past year to close the last trading session at $218.10.
LOW’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
LOW has a B grade for Quality. It is ranked #16 out of 59 stocks in the B-rated Home Improvement & Goods industry.
In addition to the POWR Ratings we’ve stated above, we also have LOW’s ratings for Momentum, Sentiment, Value, Stability, and Growth. Get all LOW ratings here.
American Eagle Outfitters, Inc. (AEO)
AEO operates as a multi-brand specialty retailer internationally. The company offers jeans, apparel and accessories, and personal care products for women and men under the American Eagle brand and intimates, apparel, activewear, and swim collections under the Aerie and OFFLINE by Aerie brands.
On June 4, AEO announced a quarterly cash dividend of $0.125 per share. The dividend was declared on June 4, 2024, and is payable on July 26, 2024, to stockholders of record at the close of business on July 12, 2024.
AEO pays an annual dividend of $0.45, which translates to a yield of 2.17% at the current share price. Its four-year average dividend yield is 2.47%. Moreover, the company’s dividend payouts have increased at a CAGR of 17.8% over the past three years.
AEO’s trailing-12-month gross profit margin and EBITDA margin of 39.19% and 12.05% are 7% and 7.9% higher than the industry averages of 36.62% and 11.16%, respectively. Similarly, the stock’s trailing-12-month levered FCF margin of 8.53% is considerably higher than the industry average of 5.45%.
In terms of forward non-GAAP P/E, AEO is trading at 11.69x, 26.8% lower than the industry average of 15.97x. Also, the stock’s forward EV/Sales multiple of 0.94 is 22.3% lower than the 1.21 industry average. Likewise, its forward Price/Sales of 0.75x is 13.8% lower than the industry average of 0.87x.
For the first quarter that ended May 4, 2024, AEO’s total net revenue increased 5.8% year-over-year to $1.14 billion. Its gross profit grew 12.4% from the year-ago value to $464.24 million. The company’s operating income of $77.84 million indicates growth of 240.9% from the prior year’s quarter.
In addition, the company’s net income came in at $67.75 million and $0.34 per share, up 267.2% and 277.8% from the prior year’s quarter, respectively.
Street expects AEO’s revenue and EPS for the second quarter (ending July 2024) to increase 8.4% and 48.9% year-over-year to $1.30 billion and $0.37, respectively. Furthermore, the company surpassed the consensus EPS estimates in all of the trailing four quarters.
AEO’s stock has gained 76.9% over the past year to close the last trading session at $20.75.
AEO’s bright prospects are reflected in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.
The stock has a B grade for Growth and Quality. AEO is ranked #18 among 60 stocks in the A-rated Fashion & Luxury industry.
Click here to access AEO’s ratings for Stability, Sentiment, Value, and Momentum.
Newell Brands Inc. (NWL)
NWL engages in designing, manufacturing, sourcing, and distributing consumer and commercial products worldwide. The company operates through three segments: Home and Commercial Solutions; Learning and Development; and Outdoor and Recreation.
On June 5, NWL’s DYMO®, a leading provider of innovative labeling solutions, and Taylor, a renowned name in custom label manufacturing, entered into a strategic partnership to make custom-printed LabelWriter® labels available for use with DYMO LabelWriter® 5 Series printers.
This strategic partnership reflects the company’s commitment to providing innovative labeling solutions and meeting the various evolving needs of its consumers.
On May 16, NWL’s Graco, America's most trusted baby gear brand, launched the next generation of soothing products - SmartSense™ Soothing Bassinet and SmartSense™ Soothing Swing, which uses innovative and patented technology to automatically detect and respond to baby's cries.
These latest innovations exemplify the company’s unwavering dedication to helping caregivers and offering enhanced comfort and convenience for families everywhere.
NWL posted net sales of $1.65 billion during the first quarter that ended March 31, 2024. Its non-GAAP gross profit rose 5.5% year-over-year to $516 million. Its non-GAAP operating income of $76 million indicates growth of 76.7% from the prior year’s quarter. Further, the company’s normalized EBITDA increased 31.2% from the year-ago value to $143 million.
As per its business outlook, NWL expects normalized EPS between $0.18 and $0.21 during the second quarter of 2024. And for the full year, the company expects its normalized EPS to be $0.52 to $0.62.
Analysts expect NWL’s revenue for the fiscal year (ending December 2025) to increase 1.1% year-over-year to $7.72 billion, and its EPS is expected to grow 28.2% year-over-year to $0.77. Moreover, the company has topped the consensus EPS estimates in each of the trailing four quarters, which is impressive.
NWL’s stock has plunged 8.9% over the past month to close the last trading session at $7.38.
NWL’s POWR Ratings reflect this robust growth outlook. The stock has an A grade for Growth and Momentum. NWL also has a B grade for Value.
Within the B-rated Home Improvement & Goods industry, NWL is ranked #31 among 59 stocks. Click here to access additional ratings of NWL for Stability, Sentiment, and Quality.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
LOW shares were unchanged in premarket trading Tuesday. Year-to-date, LOW has declined -1.04%, versus a 12.75% rise in the benchmark S&P 500 index during the same period.
About the Author: Rjkumari Saxena
Rajkumari started her career as a writer but gradually shifted her focus to financial journalism, leveraging her educational background in Commerce. Fascinated by the interplay of business and economic shifts in equities, she aspires to evolve as an analyst. With a knack for simplifying complex financial concepts, her mission is to empower investors with insights that lead to profitable decisions.
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