In the wake of last week’s ugly employment report of zero job growth in August, and the highest unemployment rate since 1984, scared consumers are scrambling to get more bang for their buck. Middle-market retailers like J.C. Penney (NYSE:JCP) and Sears (NASDAQ:SHLD) are struggling as shoppers instead opt for super-discount retailers and warehouse stores — a shift to frugality that could be good news for shares of the right bargain retailers.
The National Retail Federation’s recent 2011 back-to-school survey found that shoppers are indeed looking for new ways to save money. The survey shows 39.9% of families are weathering current economic conditions by purchasing more store-brand or generic items, 29.8% are doing more comparison-shopping online, and 50% are shopping for sales. That’s because, 43.7% of survey respondents said, the economy simply is forcing them to spend less.
But the most important trend for retail stocks is this: The majority of back-to-school shoppers — 68.4% — plan to make at least one purchase from a discount store. BIGresearch estimates combined K-12 and college spending will reach $68.8 billion this year, indicating that discounters are cashing in on the second biggest retail spending event behind the winter holiday season.
That news may make shares of deep discounters a safer haven than usual for investors in this volatile and uncertain market. Here are three discount retail stocks that are well poised to benefit from greater consumer frugality:
BJ’s Wholesale Club
BJ’s Wholesale Club (NYSE:BJ) announced Sept. 1 that its same-store sales rose 11.5% in August, with sales of food increasing by about 10% and general merchandise up by about 4%. While some of that gain can be attributed to Hurricane Irene, the company’s strength in the space is notable.
BJ’s set a new 52-week high of $52.46 on May 18 and, at $50.93, is trading at more than 25% above its 52-week low of $40.69 last September. With a market cap of $2.79 billion, the stock has a price/earnings-to-growth ratio of 1.66, which indicates the stock might be slightly overvalued. The company’s debt position looks fabulous — BJ’s total debt is a mere $220,000, but it has total cash of $286.03 million.
Dollar General
Dollar General (NYSE:DG), in a conference call Aug. 30, announced total sales growth of 11.2%, to $3.6 billion, including a same-store sales increase of 5.9%. The company credited the sales increase to “consumers who continue to face high unemployment rates, high gasoline and high food cost.” Officials went on to say that the highest sales growth was in consumables, with the strongest results in food, snacks and perishables.
DG set a new 52-week high of $36.86 on Aug. 31 and, at $36.45, is trading at more than 37% above its 52-week low of $26.65 in February. With a market cap of $12.45 billion, the stock has a PEG ratio of 0.94, which indicates the stock might be slightly undervalued. But the company’s debt position is a bit of a concern: total cash of $114.79 million compared to a total debt of $2.80 billion.
Family Dollar
Family Dollar (NYSE:FDO). While middle-income consumers have fallen in love with Family Dollar for its super deals, investors are finding the stock a strong performer in a weak economy. Remember, this was one of the best-performing stocks back in 2008 when the earth opened up underneath the retail sector. Family Dollar announced on Aug. 16 that it had partnered with T-Mobile to offer a prepaid T-Mobile device to consumers.
FDO set a new 52-week high of $56.92 on May 26 and, at $50.36, is trading more than 21% above its 52-week low of $41.31 in February. With a market cap of $6.06 billion, the stock has a PEG ratio of 1.17, indicating it might be slightly overvalued. The company has a solid debt position: total cash of $358.26 million compared to total debt of $548.53 million.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks mentioned here.
