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The changing shopping habits of a pressured middle class continue to boost the fortunes of one group of U.S. stocks in particular – discount retailers.
Almost all discount retailers have profited from the Great Recession, but those on the lowest rungs, such the dollar stores, have gained the most.
The recent same-store sales retail report for June confirmed this trend as the U.S. economy continues to falter.
Same-store sales for several mid-tier retailers got hit hard, while most discount retailers outperformed. Notably, most high-end retailers, such as Nordstrom Inc. (NYSE: JWN) and Saks Inc. (NYSE: SKS) also continued to do well.
"The high-end consumer has fared particularly well throughout this recovery,"Ken Perkins, president of Swampscott, MA-based Retail Metrics, told Bloomberg News. "On the low end, a lot of middle-income consumers have traded down."
As a result, two discount retailers fared better in June than analysts expected.
The projected sales rise at Ross Stores Inc. (NYSE: ROST) (Ross Dress for Less) was 4.8%; actual sales rose 7%. For The TJX Companies (NYSE: TJX) (T.J. Maxx and Marshall's), the estimate was 4.2%, while actual sales hit 7%.
Two mid-tier retailers that took it on the chin were Macy's Inc. (NYSE: M) and Kohl's Corp. (NYSE: KSS). Macy's 1.2% increase in same-store sales missed the target number of 1.9%, a rarity for the retailer. Sales at Kohl's fell 4.2%, even worse than the 3.2% drop analysts expected.
"There is a dichotomy" among retailers, Nancy Liu, retail strategist at Kurt Salmon, told Dow Jones Newswires. "If you're middle class, you're not going to spend freely across stores because you're concerned about money. This makes for a more competitive environment for retailers."
The phenomenon has put discount retailers among the top-performing U.S. stocks this year.
Ross stock is up 13.16% in the past three months and 40.58% in 2012. TJX is up 10.81% over the past three months and 36.49% year to date.
The mid-tiers, on the other hand, have underperformed the overall market. Macy's is down 19% over the past three months, Kohl's 5.59%. For the year, Macy's stock is up slightly, 1.27% and Kohl's down 4.5%.
The Standard & Poor's 500 index is down 3.99% over the past three months but up 5.94% for the year.
""The consumer is in a watch-and-wait mode,"' Arnold Aronson, managing director of retail strategies at consulting firm Kurt Salmon, told the Associated Press. ""She has to be seduced by value."
The Rise of the Discount Retailers
But as the beleaguered middle class hunts for value, it's the deep low end of the discount retailer category – the dollar stores – that have attracted the most new customers.
These companies – Dollar Tree Inc. (Nasdaq: DLTR), Dollar General Corp. (NYSE: DG) and Family Dollar Stores Inc. (NYSE: FDO) – aren't included in the monthly same-store sales report, but they've done exceptionally well this year. The dollar stores have outperformed even other discount retailers by a wide margin.
The rule of thumb has been that the more the economy has sputtered, the better the dollar stores have done. That pattern becomes still more apparent if you go all the way back to start of the Great Recession in December of 2009.
Given the bleak outlook for the U.S. economy this year and into early 2013, these dollar store stocks could still have some upside despite the big run-ups in price over the past few years:
- Dollar General: This discounter has had the best 2012 of the group, with a 31.65% pop in its stock price since Jan. 1. Since its IPO in November 2009, DG has risen 288%. Revenue in the most recent quarter was up 13% year over year, and earnings per share rose by 40%. Analysts expect that trend to continue. DG recently traded at about $54, and has a one-year average target price of $58.50.
- Family Dollar: FDO is up 19% year to date, and 270% since the onset of the Great Recession. FDO's earnings per share for its third quarter were up 16.5% year over year. It was Family Dollar's 17th consecutive quarter of double-digit growth. Revenue was up 9.6%. However, gross margins and operating margins contracted slightly, possibly foreshadowing lower profits in the future. Family Dollar did raise its dividend in January, and now pays 21 cents a share for a yield of 1.2%. FDO recently traded at about $69, and has a one-year target price of $70.48.
- Dollar Tree: A Wall Street favorite for some time, Dollar Tree is up 25.26% in 2012 and an eye-popping 490% since the end of 2007. Revenue at DLTR was up 11% in its most recent quarter while earnings per share rose 15%. Customer traffic continues to rise, and the company is in the midst of a huge expansion from 4,450 stores in the U.S. and Canada to 7,000 in the U.S. and another 1,000 in Canada. DLTR recently traded at about $52, and has a one-year target price of $53.58.
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