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The Discounters Still Win

By Rich Duprey - Updated Apr 6, 2017 at 12:31PM

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An improving economy doesn't mean people stop shopping at the deep discounters.

Not even six months back on the public markets and already deep-discount retailer Dollar General (NYSE: DG) is leading the field of battle. It recently reported that fourth-quarter revenue jumped 12%, to $3.2 billion, generating adjusted earnings of $0.51 a share, well ahead of analyst expectations of $0.43 a share. Same-store sales were up more than 7%.

A rising tide ...
Of course, all the discounters seem to be doing well. Family Dollar (NYSE: FDO) turned in an excellent quarter with a 33% jump in earnings on a 5% increase in sales, and Big Lots (NYSE: BIG) had a big quarter, too, with a 34% rise in profit.

In fact, retail in general seems resplendent leading the economy out of the recession. From department stores to bookshops, game retailers to clothing stores, the entire sector is on the rise. March's sales numbers looked terrific with comps up 9.1% on average, but there's a lot of trouble on the horizon.

... means we might all drown
For example, last year's March numbers were so dismal it would have been near impossible not to post an increase in sales this time around. Worse, both Macy's (NYSE: M) and Target (NYSE: TGT) said the early Easter holiday that helped bolster everyone's numbers -- it came eight days earlier than last year -- will likely result in a letdown for April. The International Council of Shopping Centers agrees, and is expecting this month's comps to be flat or down by as much as 3%. Kohl's (NYSE: KSS) is expecting a double-digit decline in comps for April following its 22% jump in March.

This is more about how little the consumer was willing to purchase last year out of fear that the wheels were coming off world economies than a testament to an economic recovery today. We've still got high unemployment, lower home values, rising numbers of foreclosures, and declining credit availability, all arguably putting the economy in even worse condition today than it was last year.

Saving is for losers
Some analysts even suggest that it's delinquent homeowners -- there's an estimated 7.4 million non-current loans in the U.S. -- who are the source of rising consumer spending. As the HousingWire blog puts it, "people are spending their mortgages."

All of which points to an ideal opportunity for the discount chains, and Wal-Mart (NYSE: WMT), too, which said it would be cutting prices on 10,000 items and highlighting its pricing power. That's why I'm still wary of the Dollar General story. If you look at valuation, it remains one of the most expensive discounters on the market in terms of its trailing earnings while Wal-Mart is one of the cheapest.

The battle's still being waged
It was an opportunistic return to the public markets for Dollar General's private equity owners, but despite a market that looks weighted toward Dollar General's niche, there are better investments to be had a better prices. The company is forecasting slowing comp growth for the year ahead, suggesting it's only won a battle so far. Dollar General could still lose the war.

Wal-Mart Stores is a Motley Fool Inside Value pick. Try any of our Foolish newsletter services today, free for 30 days.

Fool contributor Rich Duprey owns shares of Kohl's but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Dollar General Corporation Stock Quote
Dollar General Corporation
DG
$253.96 (-0.53%) $-1.34
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$128.87 (0.99%) $1.26
Target Corporation Stock Quote
Target Corporation
TGT
$165.12 (-1.11%) $-1.85
Macy's, Inc. Stock Quote
Macy's, Inc.
M
$17.53 (-6.66%) $-1.25
Kohl's Corporation Stock Quote
Kohl's Corporation
KSS
$29.68 (-5.66%) $-1.78
Big Lots, Inc. Stock Quote
Big Lots, Inc.
BIG
$21.84 (-6.59%) $-1.54
Family Dollar Stores Inc. Stock Quote
Family Dollar Stores Inc.
FDO.DL

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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