3 Back to School Stocks for 2023

Canadian consumers are experiencing significant price pressure due to persistent inflation. With consumer prices index jumping 3.3% in July, Canadians are paying that much more for goods and services than a year ago. This, as a consequence, could pave the way for another Bank of Canada interest rate hike in September.

For consumers, this situation poses a challenge as they look for ways to economize and turn to retailers that offer budget-friendly products to manage their back-to-school expenditure, the second highest spending of the year for families, after Christmas.

This bodes well for the following stocks that are well-positioned to benefit not only from the seasonal back-to-school revenue bump but also from products and services that go far beyond school supplies, catering to a range of consumer needs.

General merchandise and grocery behemoth, Walmart (WMT) offers the lowest-priced goods to consumers. The retailer functions as a convenient one-stop shopping destination through over 4,700 stores in the U.S. and over 10,000 stores globally. It serves around 240 million customers globally, generating over US$420 billion in domestic sales, while international market accounts for US$100 billion in sales.

Walmart’s unrivaled scale compared to its brick-and-mortar rivals makes it a formidable player in a dynamic retail landscape. “Walmart benefits from an expansive physical footprint and entrenched position in the communities it serves, putting the retailer in close proximity to the vast majority of U.S. consumers,” says a Morningstar equity report.

The firm has maintained its position as the leading retailer in the country for more than three decades owing to its commitment to providing an extensive range of products at affordable prices, the report adds.

Despite stiff competition from e-commerce giant Amazon, Walmart enjoys a strong position as the primary domestic retailer in terms of dollar sales, affording it unparalleled access to consumer dollars.

“We expect the firm to continue leveraging its robust positioning to hold down prices and stocking its shelves with low-priced goods–reinforcing the firm’s cost advantage,” asserts Morningstar equity analyst Noah Rohr who recently lowered the stock’s fair value from US$152 to US$145, due to a slight pullback in Morningstar’s near-term profitability forecast.

U.S.-based global online retail heavyweight, Amazon (AMZN) amassed an eye-watering US$386 billion in sales and about US$578 billion in physical/digital online gross merchandise volume in 2021. Retail accounted for approximately 80% of total revenue, followed by Amazon Web Services (10-15%), and advertising services (6%). International segments constituted 25%-30% of Amazon's non-AWS sales, led by Germany, the United Kingdom, and Japan.

The online retail giant has captured a lion’s shar of the markets it serves, particularly e-commerce and cloud industries. “It benefits from numerous competitive advantages and has emerged as the clear e-commerce leader thanks to its size and scale, which yield an unmatched selection of low-priced goods for consumers,” says a Morningstar equity report.

As the ongoing shift towards e-commerce remains steady, the company continues to increase in market share, despite its colossal size.

“Prime ties Amazon’s e-commerce efforts together and provides a steady stream of high-margin recurring revenue from customers who purchase more frequently from Amazon’s properties,” says Morningstar equity analyst Dan Romanoff, who puts the stock’s fair value at US$150.

Amazon’s retail business possesses a wide moat built on cost advantages, intangible assets, and network effects. Amazon’s competitive strength is assessed based on “a combination of online stores, third-party seller services, subscription services, and physical stores,” rather than individual business segments, notes Romanoff.

Low-cost, no-frills retailer, Dollar Tree (DLTR) operates discount stores in the U.S. and Canada under its namesake banner and Family Dollar units. Dollar Tree chain features branded and own-label goods, with most items priced at $1.25. Just under half of Dollar Tree’s sales comes from consumables (including food, health and beauty, and household paper and cleaning products), and nearly 50% from variety items (including toys and housewares), and another 5% from seasonal goods.

The Dollar Tree brand has a notable track record of impressive performance, driven by its unique value proposition. “Accounting for around half of sales, the Dollar Tree banner's wide assortment of products at US$1.25 or less has appealed to customers, drawing a broad range of low- to middle-income consumers,” says a Morningstar equity report.

he idea still has ample space for expansion (encompassing square footage growth in the low- to mid-single-digit range over the long term), growing its geographic footprint and also increasing density.

Prospects are less attractive for Family Dollar, which is susceptible to competitive pressures from a bevy of convenience stores, particularly in urban areas, cautions Morningstar equity analyst Sean Dunlop.

“Despite the headwinds, both chains should deliver long-term top-line and margin growth in aggregate, attributable to consumers' desire for convenience and value even as the competitive landscape becomes more challenging,” adds Dunlop, who recently lowered the stock’s fair value to US$105 from US$108, incorporating lower long-term growth forecasts.