Discount Shares Continue Expansion, Primed To Profit Like It's 2009

This article was originally published on Motif Investing.

Traditionally viewed as a safe haven for investors during tough economic times, discounters are emerging as a portfolio insurance policy during good times, as well. Over the past year, middle-class retail bastions like Wal-Mart WMT, Ross Stores ROST, Big Lots BIG and Dollar General DG have posted strong gains; higher wages and a strong employment outlook are likely to push retail sales higher in 2017.

The last severe downturn, the Great Recession of 2007-09, shaved $16.4 trillion from U.S. household wealth – almost enough money to fuel the entire economy for a year. Real unemployment soared past 16 percent, and almost 3 in 4 Americans surveyed said they had either lost a job or knew a family member or close friend who had become unemployed.

A 2010 Pew Research Center study found that more than 60 percent of Americans had cut back on spending, and 1 in 3 said they planned to spend less after the recession ended. They apparently stayed true to their word; while a slow recovery favored wealthy consumers, middle-class Americans who had been forced to shop at discounters by economic circumstance remained there by habit. Sales at Dollar General and Family Dollar rose more than 25 percent between 2010 and 2013.

The 800-Pound Gorilla

As the planet’s largest retailer, the Bentonville, Ark.-based Wal-Mart would seem to be a prime candidate to reflect the state of the economy. Yet in the depths of the Great Recession, the company’s same-store sales – a key indicator — rose more than 5 percent annually at its 5,000 U.S. stores. A 2011 University of California-Berkeley study found the average customer had spent $43.95 per visit, making 27 trips to Wal-Mart each year.

While Wal-Mart isn’t a pure discounter, its sheer size has continued to attract bargain-hunters and people on limited incomes. Although the U.S. Department of Agriculture is considering appealing a South Dakota court ruling that it release individual store revenues for its Supplemental Nutrition Assistance Program, also known as food stamps, the company estimated that it received about 18 percent of the $80 billion program in 2013. The number of food stamp recipients has decreased slightly over the last three years to 43.5 million people, but 1 of every 6 American households still requires government help to buy food.

Wal-Mart shares have increased about 10 percent over the last year, outpacing gains enjoyed by competitors such as Target TGT and Costco COST. The retailer is in the process of cutting roughly 1,000 corporate jobs and shut 269 stores last year, in part to focus on increasing its online presence. Finally, the company is in the midst of a two-year, $20 billion stock buyback plan that can only boost share value. Twenty-eight of 31 analysts covering the company rate the stock as a hold or buy.

Dollar Values

At the other end of the discount spectrum are retailers such as Dollar General, Big Lots and Dollar Tree DLTR. Shares of all three have made modest gains over the last year, but the big story may be that many analysts believe there’s still room for growth. In the heart of the Great Recession, Dollar Tree stock traded around $10.50; lately, a share is valued at roughly $75. Big Lots has soared from $17.50 to almost $50 during the same time, and Dollar General shares have more than doubled, rising to $71 per share from about $22 during the worst of the downturn.

Although its average 7,400-square-foot size is dwarfed by Wal-Mart, Dollar General has one surprising advantage. After adding 900 stores in 2016 and remodeling another 900, it has plans to add 1,000 more locations this year, bringing its U.S. total to almost 15,000 locations. And for investors who are leery of the Goodlettsville, Tenn.-based company’s estimates of 7 to 10 percent annual growth, they can take comfort in the company’s record of 26 consecutive years of increases in same-store sales. Dollar Tree, based in Chesapeake, Virginia, has also expanded rapidly, growing to almost 14,000 stores after it beat out Dollar General in 2015 to acquire Family Dollar in an $8.5 billion deal. While such huge mergers can often depress share values because of the large amounts of debt required, investors have punished the company; its stock has remained more or less even during the last year.

A much smaller chain with fewer than 1,500 stores, the Columbus, Ohio-based Big Lots, hasn’t had problems with flat share prices. Over the past year, its stock has shot up 40 percent. While its revenue figures haven’t been rising, analysts see the company’s decision to close many of its under-performing stores as a step in the right direction, and the consensus estimate sees Big Lots stock rising from its current level of $49 per share to $54.50.

Off-Price, On Target

The off-price retail segment of the discount market is performing well, also. Off-price retailers primarily sell irregular items, closeouts, end of season, overrun and other merchandise before selling it at discount. Shares of TJX Companies TJX, the Framingham, Mass.-based retailer whose stores include T.J. Maxx, Marshalls and Home Goods, have risen more than 10 percent over the last year. Ross Stores, headquartered in Pleasanton, Calif., has posted an almost 30 percent gain for the 12-month period.

TJX, which has about 3,600 stores worldwide, plans to expand to 5,600 locations over the long term, according to its chief executive. Ross, which has more than 1,300 stores, also is working on an expansion plan that could increase its presence to 2,500 stores.

While online titans such as Amazon AMZN have hurt middle-income retail bastions such as Macy’s, Ross and TJX stores have boomed because of the value to consumers. Instead of having to wait for sales at department stores, consumers know they’ll be able to buy clothes at a discount. “It’s more like treasure hunting,” a shopper explained recently to the Chicago Tribune.