This Was the Most Loved Discount Retailer in 2013, but Not the Best Investment

Consumer sentiment is important, but you need to look at the whole story prior to making any investment decisions.

Feb 11, 2014 at 4:30PM

According to YouGov's BrandIndex, (NASDAQ:AMZN) was the most-loved discount retailer in the United States in 2013 with a buzz score of 30.6. This is a high score, which indicates that positive sentiment for Amazon has remained high. While these scores range from negative 100 to 100, it's still rare to see a score above 30.  

While positive sentiment remained high for Amazon throughout 2013, we're now in 2014. Past results play a role, especially if they're recent past results, but as you have likely heard 1,000 times by now, past results don't guarantee future results. We'll take a look at some positive and negative developments for Amazon to see if it's likely to present a better investment opportunity than the other top four discount retailers, considering positive sentiment in 2013. 

Prior to reading further, note that buzz scores are formulated by asking consumers if they have heard anything positive or negative about the brand over the past two weeks, whether via advertising, news, or social media. With that out of the way, let's see what other four discount retailers made the top five for 2013 prior to moving on to some quick yet important investment analysis.  

The top five
Amazon was No. 1 in 2013 for consumer sentiment, with Target (NYSE:TGT) ranking No. 2 with a score of 20.7 (that's the shocker, by the way), Costco Wholesale (NASDAQ:COST) ranking No. 3 with a score of 19.0, Dollar Tree (NASDAQ:DLTR) ranking No. 4 with a score of 9.9, and Big Lots (NYSE:BIG) ranking No. 5 with a score of 9.6. 

A pause in domination
Amazon ranked No. 1 for a variety of reasons. One reason is that CEO Jeff Bezos is all about the customer, even sacrificing consistent profits in order to please loyal customers ... and to attract new ones. Amazon did recently announce that it might increase its Amazon Prime annual membership fee of $79 by $20 or $40, due to increased shipping costs. This could reduce positive sentiment, but if Amazon opts for the former rate increase then it shouldn't be a catastrophic event. Amazon hasn't increased the annual membership fee for the nine years Amazon Prime has been in existence.  

Amazon has been punished recently for not meeting lofty Wall Street expectations, but Amazon could rekindle its love affair with Wall Street if it increased its Amazon Prime annual membership fee by $20. 

Off the mark
The data breach was a massive hit that led to Target's lowest buzz score since 2007. Positive sentiment has rebounded since then, partially in thanks to a limited-time 10% discount on most store items and free credit monitoring. However, don't get too excited.

Target had to increase staffing to deal with the data breach, which is going to increase costs. This is on top of legal fees and increased investments in technology to better protect customers. Prior to the data breach, comps were supposed to come in flat. Now they're expected to come in at negative 2.5%. 

A good dream follows a nightmare
Investing in discount retailers in this consumer environment takes guts. If you possess guts (in a metaphorical sense), then you might want to consider Costco.

This is a company that treats its customers and employees well while offering a clean and comfortable shopping environment with good values. Costco recently delivered comps growth of 5% for December, with domestic and international comps increasing by 5% and 7%, respectively. Strong consumer sentiment doesn't hurt, either. 

Climb that tree
Dollar store customers are hurting. They have had to deal with the payroll tax increase (actually the end of a payroll tax holiday), a lack of wage growth (the most important factor), food stamp cuts, as well as increased gasoline and food costs. That said, if any dollar store can weather an economic storm, then it's Dollar Tree. The reason is simple.

Imagine you live in a neighborhood with a Dollar General and a Dollar Tree. Dollar General consistently offers promotions, which might pique your interest. But regardless of how enticing those promotions are, you know that Dollar General can't offer as much overall savings as Dollar Tree since the latter sells all items in the store for $1 each. Furthermore, Dollar Tree plans on expanding its store size in order to offer more consumables. 

Not good enough
Big Lots has seen top-line growth of just 0.79% over the past five years. Comps also declined 2.5% last quarter. Does that excite you? Enough said. 

Big Lots is seeing weakness in the Home, Hardlines, Toys, and Electronics categories. Don't be tempted by the stock trading at just nine times earnings.

The Foolish bottom line
Amazon is without a doubt a long-term winner, but it has hit a rough patch. Wall Street wants consistent profits, and until Amazon delivers on this front renewed optimism on Wall Street isn't likely to return, regardless of how consumers feel.

Target's data breach might be seen as over by its customers, but there isn't yet enough information on its lingering impacts for Target to be considered as a potential investment option.

Costco is a winner. Not only do customers love it, but so do employees. That's a telling sign. Strong comps numbers in a weak consumer environment are significant positives. 

Dollar Tree is the best long-term option out of the dollar stores, simply because its pricing will drive the most traffic in overlapping locations. 

Avoid Big Lots right now. Consumer sentiment might be good, but negative comps and minuscule top-line growth over a five-year time frame aren't good signs.

Please due your own research prior to making any investment decisions. 

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends and Costco Wholesale. The Motley Fool owns shares of and Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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