A dollar can stretch only so far. That's why the stimulus checks the government doled out over the past quarter helped discount-oriented stores Family Dollar
Big Lots saw profits rise 11% for the second quarter, and per-share earnings of $0.32 soared 45% from an aggressive buyback program. Sales ticked 1.9% higher to $1.1 billion, and the results looked strikingly similar to those in the first quarter. Meanwhile, rival Dollar Tree posted a more impressive 12.5% rise in sales and boosted its bottom line by 15%.
The obvious common denominator is that both companies are offering rock-bottom prices for decent goods -- an attraction that resonates with financially strapped consumers. Getting a few extra bucks from the taxpayer piggybank allowed folks to stock up, and the best places to do that were the deep discounters' stores.
That's the reason these companies have posted consistently higher same-store sales than other retailers have, including most teen-apparel chains and department stores. Even midlevel retailers such as Target
Yet there's another recurring theme among the discounters, and this one isn't so positive. The back half of the year looks as though it'll be a lot softer than the front portion was. Wal-Mart is forecasting third-quarter earnings whose high end meets analyst expectations, so the company could end up reporting an earnings miss next time out. The effects of the stimulus package appear to be fading away now, and both Family Dollar and J.C. Penney
Big Lots and Dollar Tree appear to be no different in this respect. The closeout specialist said same-store sales would probably not be as robust in the third and fourth quarters, while the dollar chain said full-year earnings wouldn't be up to forecasts, even though it raised its own expectations.
Discount-oriented retailers certainly gained short-term benefits from the government's handout, but that boost has just about ended. Congress may be considering yet another round of stimulation, but even if we get another round of checks, the long-term benefits will be about as ephemeral. Still, these companies represent some of the better opportunities for profit in times like these, even when the "free" money stops rolling in.
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Fool contributor Rich Duprey owns shares of Wal-Mart but has no financial position in any of the other stocks mentioned in this article. You can see his holdings. The Motley Fool has a disclosure policy.