Wednesday, January 7, 2009

Discount Retailers Continue to See Strength

Throughout this consumer-led recession, we've seen the trading-down from specialty goods and name brands to generic goods and discount items, not out of choice, but necessity. Wal-Mart (WMT) has seen strong sales, and that trend should continue. But I'd take it a step further and take look at dollar stores. Family Dollar (FDO) posted strong results and raised their profit outlook. There aren't many companies doing that right now.

"The company expects full-year sales to rise 4 percent to 6 percent, up from a prior outlook of 3 percent to 5 percent. On a same-store basis, it forecast a sales gain of 2 percent to 4 percent; it previously called for a rise of 1 percent to 3 percent."

Dollar Tree (DLTR) would be another similar company. These companies appear to be some of the strongest beneficiaries of a significant recession.

I've taken a look at some other possibilities such as pawn shops and payday loan companies. These companies are performing well also as consumers are strapped for cash. Trader Mark did a nice profile on this thesis. However, the payday loan companies could come under some regulatory pressure under Obama/Biden. They've discussed lowering interest rates and tightening standards for these lenders in their economic policy:

"Obama and Biden will extend a 36 percent interest cap to all Americans. They will require lenders to provide clear and simplified information about loan fees, payments and penalties, which is why they'll require lenders to provide this information during the application process."

Not that its a bad thing, but it could question the strength of these companies as strong investments during the next year or two.

I'd stick to the discount retailers for now. Many of their stocks have been bid up a bit, but should continue to see strong performance in a difficult environment.

Disclosure: None

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