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Down But Not Out for the Discount

Attention bargain hunters! Where do you turn when discretionary spending is guarded? Why not go where the bargains are? Discount department stores have been turning profits for ages by taking meager markups in exchange for rapid inventory turnover. They're only beginning to heat up now that money's too tight to mention.

Wal-Mart(NYSE: WMT) has honed its affordable pricing skills to become the world's leading retailer. In its last quarter, the Sam Walton-founded chain reported sales of just over $48 billion. Even as other retailers were coping with consumers on tighter purse strings, Wal-Mart managed to grow sales at the same-store level by 3.7%.

The reasoning is simple: Prudent shoppers, facing personal budget cuts, find their way to the discount department stores. Meanwhile, the current client base may spend a little less, but they have no other economic options. According to K-Mart(NYSE: KM) CEO Chuck Conaway, the "Blue Light Special" discounter has been able to grow its customer base over the past year. While the chain sees the possibility of flat same-store sales over the next two quarters, it is also looking to achieve those results while spending 20%-30% less in advertising.

Both companies have also become even more "all-weather" proof by expanding into groceries. Each discounter had already cut its supermarket teeth in the warehouse club business (Wal-Mart with some degree of success at Sam's Club, and K-Mart failing with Pace). The extension into offering a wide array of refrigerated and frozen food products hasn't been smooth, but it is now starting to bear fruit. Wal-Mart, for instance, saw its food sales grow by a staggering 34% during the March quarter.

As I had pointed out in a recent retail take, the state of fiscal fashion begins and often ends at the storefront. So with April's same-store sales figures at full-price department store chains like Nordstrom(NYSE: JWN) and May(NYSE: MAY) struggling with 6.0% and 8.3% declines, respectively, while nine out of the ten leading discount department stores showed same-store hikes, the thrifty consumer had spoken.

Target(NYSE: TGT) is comfortable in its ability to grow earnings 15% annually, fueled by a 2.8% uptick in the comparable stores for the namesake chain. Of course, the savvy shoppers don't stop there. Deep niche discounters are faring even better. Tuesday Morning(Nasdaq: TUES) is scoring well stocking quality overstocks of gifts and home furnishings. Same-store sales shot up by 8.4% for the last quarter. For the month of April, Big Lots(NYSE: BLI) saw its same-store sales climb 5.0% higher.

So, the fact that the consumer is trying to part with less money doesn't mean that all retailers will suffer. The same is probably true for shareholders of the beneficial discounters.

Have a wonderful summer! 

Rick has big plans for the summer season. Real big! Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.

Summer Stocks represents the opinion of one Fool and should in no way be taken as the opinion of either The Motley Fool, Inc. or the company in question, or as representative of anyone or anything other than that specific Fool's thoughts.


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