Where Bernstein sees strength in U.S. retail going forward

Bernstein identifies opportunities in U.S. retail for H2 2025, driven by a 'flight to value' and consumer trade-down trends, favoring retailers with price leadership. The firm's top short-term pick (6-9 months) is Dollar General (DG), citing underappreciated gross margin recovery from its turnaround, despite a 50% year-to-date stock increase. For the 3-5 year horizon, Bernstein prefers Walmart (WMT), believing its e-commerce profitability and potential Indian IPO are underestimated, offering significant upside beyond its current valuation.

Analysis

According to a research note from Bernstein, a consumer shift towards value is creating distinct investment opportunities within the U.S. retail sector for the second half of 2025. The firm anticipates that as tariff-driven volatility eases, retailers with strong price leadership will benefit from a sustained consumer "trade down" trend. This has already driven significant year-to-date outperformance in Dollar General (DG) and Dollar Tree (DLTR), which are up approximately 45% and 25%, respectively. For the near-term horizon of 6-9 months, Bernstein designates DG as its top pick, arguing that its recovery from self-inflicted operational issues is underway and its potential for gross margin improvement from better mix and reduced shrink is not fully appreciated by consensus. Despite a 50% year-to-date rally, the firm notes DG's valuation remains below historical levels. For a longer-term, 3-5 year outlook, Bernstein favors Walmart (WMT), positing that its current valuation does not fully account for underestimated e-commerce profitability and the potential value-unlock from a future IPO of its Indian holdings. While import-heavy retailers like Target and DLTR have faced gross margin pressure from tariffs, Bernstein's view is that current tariff levels have been largely manageable for the sector.

Key Decisions for Investors

• Investors with a 6-9 month horizon should consider Dollar General (DG), as its ongoing turnaround and potential for gross margin recovery are viewed as underappreciated catalysts.
• For long-term portfolios, Walmart (WMT) warrants consideration based on the thesis that its e-commerce profitability and the potential IPO of its Indian assets are not fully priced into the stock.
• Monitor consumer spending patterns and company-specific gross margin reports closely, as the ability to manage tariff costs and capitalize on trade-down trends remains a key differentiator for performance in the retail sector.
• Given the significant year-to-date gains in dollar stores, investors should weigh the potential for further upside at DG against the longer-term, strategic growth narrative at WMT.