Key Points:
- Consumers continue to seek out bargains due to the sluggish economy and credit crunch
- The trend towards thriftiness is benefiting discount retailers such as Big Lots and Dollar Tree
Recent trends made Tuesday's bullish earnings report from closeout retailer Big Lots (BIG) not all that surprising.
Consumers have become thriftier, a trend I've discussed previously in this column.
Throughout the summer, discount-oriented stores have fared better than their "full-price" brethren. For example, Dollar Tree (DLTR) saw same-stores rise 6.5% in the second quarter, while Abercrombie & Fitch (ANF) experienced a 4% drop.
The sluggish economy has consumers in savings mode. The Conference Board's August survey revealed that a greater proportion of consumers are increasingly worried about the labor market. At the same time, gasoline prices are still at very high levels - even after the pullback that occurred this month.
Falling home prices are causing consumers to feel less wealthy. Furthermore, the lower prices are making it more difficult to use home equity loans to support spending habits.
Then there is the credit crunch. Lending requirements have tightened across the board, while interest rates have increased.
A growing proportion of people are struggling to pay their credit cards. Capital One (COF) stated in a recent SEC filing that its net charge-off rate rose again last quarter. (Charge-offs were 5.67% last quarter versus 3.47% a year prior.)
Finally, I stated in last Friday's Earnings Preview, Big Lots has a history of exceeding expectations. Tuesday's report marked the 10th consecutive positive earnings surprise.
Big Profits
Big Lots earned 32 cents per share from continuing operations during the second quarter, a sharp increase over last year's profit of 21 cents per share. Brokerage analysts had been expecting 27 cents per share. (The consensus estimate included positive revisions made over the past few weeks.)
Revenues rose 1.9% to $1.1 billion, aided by a 2.8% increase in same-store sales.
BIG believes it can maintain the positive momentum throughout the second half of the year. As such, it raised its full-year EPS guidance between $1.90 and $2.00 per share. Brokerage analysts were projecting $1.90 per share at the time of the report and it is likely we will see this forecast increased.
Dollar Tree Also Beats
Wednesday morning, before the open, Dollar Tree topped second-quarter expectations. The retailer reported profits of 42 cents per share, 2 cents above the consensus estimate and 27.3% higher than a year prior. It was the fourth consecutive positive earnings surprise for DLTR.
Sales jumped 12.5% to $1.09 billion, driven by a 6.5% increase in same-store sales. CEO Bob Sasser credited "increased demand for basic, consumable product" as the reason why more people shopped at his stores.
DLTR raised its full-year EPS forecast to between $2.33 and $2.43, up from prior guidance of $2.23 to $2.39. Recent upward revisions had put the consensus earnings estimate for this year at $2.43, but the recent surprise might have brokerage analysts viewing their projections as being too conservative.
Other Discount Retailers Doing Well Too
Several other companies within Retail-Discount Variety, besides BIG and DLTR have raised guidance recently, including Ross Stores (ROST) and The TJX Companies (TJX).
Ross Stores earned 54 cents last quarter, matching the high end of the company's preannounced earnings and brokerage analysts' expectations. Per share profits were 46% higher than a year prior.
Second-quarter revenues reached $1.64 billion, a 14% increase. The growth was led in part by a 6% increase in same-store sales.
Following the report, ROST raised its full-year guidance. The company now anticipates earnings between $2.33 and $2.38 per share, a projected increase in profits of about 24%. Nearly all of the 9 covering brokerage analysts raised their forecasts in response, pushing the consensus earnings estimate up to $2.35 per share.
The TJX Companies earned 47 cents per share, matching expectations. Profits were 24% higher than a year prior.
Revenues rose 7%, reflecting a 4% increase in same-store sales. Higher traffic, as was the case with other discount retailers, helped sales.
TJX now expects to earn between $2.26 and $2.31 this year, versus $1.66 last year. The raised guidance prompted all 11 covering brokerage analysts to raise their full-year forecasts to an average of $2.31 per share.
BIG is a Zacks #1 Rank ("strong buy") stock. DLTR, ROST and TJX are Zacks #2 Rank ("buy") stocks. Retail-Discount Variety also contains three other Zacks #2 Rank stocks: Family Dollar (FDO), Fred's (FRED) and Wal-Mart (WMT).
Related ETFs
Exchange-traded funds such as S&P Retail SPDR (XRT) and Retail HOLDRs (RTH) cover the entire retail sector. There is no ETF that focuses specifically on the discount retailers.
Given that many retailers are struggling, investors should consider focusing on specific retailers as opposed to targeting the entire sector.
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