Gen Z's love of discount stores could send these 3 retail stocks soaring as much as 18%, Bank of America says

• Millennials and Gen Z are increasingly shopping at discount stores like TJ Maxx, Burlington, and Ross.
• Those shares could see as much as 18% upside if younger consumers keep looking for value, BofA says.

Gen Z wants more bang for their buck, and their love of a good deal could drive shares of some discount retailers up nearly 20%, Bank of America says.

Analysts at the bank see big upside for retailers TJ Maxx, Burlington, and Ross.

Younger generations are shopping at discount retailers at higher rates than older generations, with Millennials and Gen Z each taking up 4% greater share of spending on value apparel in the last year.

That's driven an overall increase in value apparel spend, up 13% this past July from the same period in 2019. The growth outpaces the 5% rise in overall apparel spending.

The report from BofA on Wednesday attributes the rise in popularity among discount stores to inflation weariness.

The bank sees shares of TJX companies — which includes stores like TJ Maxx, Marshalls, and Home Goods — rising to $135 each, 14.6% higher than their intraday high of $117.76 on Wednesday.

The analysts see Burlington and Ross Stores shares rising 16% and 18% from Wednesday highs, respectively.

"Off-price has attracted the customer, helped by the quest for value amidst persistent multi-year inflation pressures," Bank of America's analysts wrote.

Inflation has eased considerably since peaking in 2022, with August's consumer price index showing a 2.5% yearly rise in prices — the lowest headline inflation rate in over three years.

But core inflation, which excludes volatile food and energy prices, came in higher than expected, leading to a brief stock market sell-off.

The bank's upside prediction will depend on the retailers' ability to retain younger customers eager for a deal, even as their incomes grow and inflation continues to ease, the analysts say.

They add that retailers could see success by adding better brands to their shelves, which could pressure margins in the near term but have a positive impact on customer loyalty—and sales and profits—in the long term.

"Attracting a young customer early in their earning years is important; showing them exciting brands at a great value goes a long way towards maintaining loyalty even as their earnings rise," the analysts said.

"The solution is offering better and better brands at great value. This can sometimes pressure margin in the near term but should have an outsized positive long-term effect on sales and overall profitability," they added.