Top 2 Retail Growth Stocks to Buy After Their Latest Sell-Off

Investors have a lot of short-term worries about the retail sector, and they seem to have a new one developing with the onset of the Iran war. They already had concerns about stubborn inflation biting into consumers' wallets and the weakening job market.

The retail sector will undoubtedly feel the effects of the Iran war, such as the spike in energy prices that has already caused a rapid increase in gasoline prices. However, the situation creates a potential buying opportunity for long-term investors. Two retailers with bright prospects, Ross Stores (NASDAQ: ROST) and Five Below (NASDAQ: FIVE), have stock prices 4.9% and 8.2% off their 52-week highs, respectively.

That should encourage patient growth investors to give these two stocks a closer look.

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1. Ross Stores

Ross Stores operates two discount chains: Ross and dd's Discount. The former is an off-price retailer that sells apparel and home fashions at 20% to 60% discounts to other retailers, and the latter sells goods at steeper discounts up to 70%.

The chains target different customers. Ross stores appeal to middle-income consumers, while dd's seeks to attract a lower-income demographic.

Both brands draw customers since people like discounts, naturally. And that's particularly true during a challenging economy. Also, Ross can buy merchandise at more attractive prices during those times.

In the company's fiscal fourth quarter (ended Jan. 31), same-store sales (comps) grew an impressive 9%. Management expects a 3% to 4% comps increase this year, and earnings-per-share growth of 6% to 11%.

The retailer has a successful formula and strong execution, and room to open new stores. It ended the year with 1,904 Ross Stores in 44 states, up from 1,831 across 43 states. The company also opened eight dd's stores to bring the number to 363 locations in 22 states.

2. Five Below

As its name suggests, Five Below offers low prices and a lineup of products, many of which target teens and pre-teens.

Sales have been advancing at a good clip. And fiscal fourth-quarter comps increased an outstanding 15.4%, capping off a year in which they rose 12.8%. The period ended on Jan. 31.

Management expects another strong year, guiding for comps to increase 3% to 5% in 2026.

And it sees plenty of room to expand. It added 227 and 150 stores in 2024 and 2025, respectively, bringing its total to 1,921 in 44 states. Management plans to expand by another 150 stores this year. The company previously stated its expectation that it could reach 3,500 stores.

Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool recommends Five Below. The Motley Fool has a disclosure policy.