Five Retail Stocks Worth Putting on Your Shopping List

Retails sales logged their third monthly increase in September, and even though the advance was hardly robust, any growth in retail sales is always positive news. As DailyFinance noted in recent looks at luxury retailers and warehouse clubs, the recovery has traced a familiar pattern, where both higher-end and discount chains benefit at the expense of middle-market players.

That's what you get when assets like stocks and bonds rebound sharply, but the job and housing markets don't. It was dubbed a "dumbbell-shaped" recovery last time around, when it took two years after the official end of the dot-com recession for job losses peaked. Citigroup analyst Deborah Weinswig has a more felicitous phrase to describe the high-end/low-end divide characteristic of a jobless recovery: the consumer hourglass. And it's an investing theme that's back in full force.

"We believe that the 'Consumer Hourglass' will continue to play out as economic factors impacting the high-income consumer stabilize, while low-income consumers continue to feel pressure," Weinswig wrote in a recent report. With that bifurcated backdrop in mind, 17 consumer analysts at Citigroup's Citi Investment Research division came up with their top global retail picks for an hourglass recovery. After drilling down into the fundamentals and valuation, here are our five favorite U.S. stocks on the list:

Avon Products (AVP)
Avon has a couple of distinct advantages that benefit it from being at the bottom of the consumer hourglass. It offers low prices, with much of its portfolio costing five bucks or less, according to Citi analyst Wendy Nicholson. What's more, Avon is finding it much easier to recruit new representatives (salespeople), as high unemployment forces more folks to find additional sources of income.

On a relative valuation basis, Avon's stock looks cheap. It currently trades at deep discounts to its own five-year average and the S&P 500 ($INX) by both forward and trailing earnings, according to data from Thomson Reuters. The 2.5% yield on the dividend is attractive -- as is the fact Avon has beaten Wall Street's earnings estimates five quarters in a row.

Dick's Sporting Goods (DKS)
Dick's is a beneficiary at the upper end of the price spectrum, writes Citi analyst Kate McShane, because it carries premium brands from the likes of Under Armour (UA), Asics, Nike (NKE) and Reebok. "We are also encouraged by Dick's best-in-class
partnership with Nike, and we believe that the new Nike Field House shop-in-shops likely supports long-term fundamental growth [and] margins," the analyst writes.

Dick's trades at a discount to its own five-year average by both forward and trailing earnings, according to Thomson Reuters. Meanwhile, analysts' average price target stands at $32.50, making the stock's implied upside more than 10% in the next 12 months or so.

Dollar General (DG)
Dollar General's core low-end consumer is likely to be cash-strapped for some time, notes Citi analyst Weinswig, while "middle-income consumers are also likely to continue to trade down as the economic recovery remains muted." Weinswig also like Dollar General's "best in class" management team and strong mix of both well-known national and cheaper private-label brands.

Shares trade at significant discounts to the broader market by both forward and trailing earnings, as well as by how fast the stock is rising relative to its growth prospects. Analysts' average price target of $33.64 gives the stock an implied upside of more than 16% in the next 12 months or so.

Dr Pepper Snapple Group (DPS)
When it comes to flavored carbonated soft drinks, this company is the market leader with brands such as Dr Pepper, 7UP, Crush and Canada Dry. It's also strong in non-carbonated drinks such as Snapple and Mott's. The weak economy has consumers shifting away from higher-price beverages like bottled water and energy drinks and opting for cheaper refreshments. That's great news for Dr Pepper Snapple, says Citi's Nicholson, since roughly 80% of its business comes from carbonated soft drinks.

Shares are roughly in line with their own five-year averages by forward and trailing earnings, according to Thomson Reuters data, but they offer deep discounts to the broader market. Analysts' average price target stands at $40.82. Throw in the 2.8% yield on the dividend, and Dr Pepper Snapple has an implied upside of nearly 17% in the next 12 months or so.

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Family Dollar Stores (FDO)
Family Dollar, like competitor Dollar General, has a strong core of low-end consumers as well as new middle-income shoppers attracted by deep savings. Additionally, the company is enjoying the fruits of new store growth and newly remodeled stores, Weinswig notes.

Family Dollar's stock trades at slight discounts to its own five-year average by forward and trailing earnings, and offers deep discounts to the broader market. With analysts' average price target standing at $48 and a 1.3% yield on the dividend, Family Dollar's implied upside comes to more than 7% in the next year.