Top discounters are upping their game as they vie for value-hungry shoppers in a still-sluggish economy.
Dollar Tree (DLTR), Family Dollar Stores (FDO), Dollar General (DG), Ross Stores (ROST) and TJX (TJX) have kept profits fat and sales sizzling by zeroing in on the consumer's quest for value with tempting deals on name-brand goods.
Their same-store sales growth has consistently outpaced retail overall. And these standouts have not rested on their laurels. The past couple of years, they have kicked up the shopping experience to sharpen their edge and draw more traffic.
Filling In The Gaps
Dollar chains have upgraded store formats, expanded their selections in higher-margin consumables like frozen foods and other categories, while making stores cleaner and easier to shop.
That helped them better serve more customers with fill-in shopping trips, says MKM Partners analyst Patrick McKeever. This way, shoppers make fewer big trips to the grocery store.
"You've got to give these companies credit for running their businesses so well," McKeever said. "They've improved the store experience, have better brands than they once had, and that's helping them pull in somewhat higher income customers.
Take Family Dollar. "We are upping our game and looking at how we can be more convenient for our customers," said spokeswoman Kiley Rawlins. "We are really looking at the assortment and how can we satisfy more of her shopping trips.
In the last few months it's expanded its assortment of frozen and refrigerated foods as well as pantry items such as cereal and sugar. It's also added tobacco and more health and beauty aids.
Family Dollar also has added more name brands, including Pepsi (PEP)soft drinks. While these efforts started too late to help its most recent third-quarter results, says Rawlins, she expects Family Dollar to see more benefits going forward.
Off-price retailers TJX and Ross offer name-brand products at deep discounts to department stores and specialty chains. Both have focused on sharpening their merchandising rather than on cosmetic changes in stores. They're keeping in-store inventories lean so they can take advantage of buying opportunities as they arise, and keep a steady flow of fresh goods into stores.
Ross, which runs more than 1,100 Dress for Less and dd's Discounts stores, has been cutting in-store inventory by mid-single digits, McKeever says.
Upgrading To Coach
TJX runs the T.J. Maxx, Marshalls and HomeGoods chains. Q2 per-store consolidated inventory, including warehouses, fell 12% vs. a 16% gain a year earlier.
Marshalls in particular has done well, carrying higher-end brands such as Coach (COH), notes Brian Sozzi, chief equities analyst at NBG Productions.
There's been a shift for the last three years to buy products at a value, with less concern of where you physically get them, says Deutsche Bank Securities analyst Dave Weiner.
"In general, you can find very high-end product at TJX," he said. "Consumers know that.
These improvements come amid an already favorable climate — for these discounters.
"The consumer traded down into them during the Great Recession, and the recovery has been very slow relative to previous recoveries," said Ken Perkins, president of Retail Metrics. "Job gains have been minimal, which has led to less discretionary income to much of the middle class. As a result, a large portion of their purchases have stayed with dollar store and off-price stores.
Dollar Tree, Dollar General, Ross, TJX and Family Dollar have been among retail's top performers. Ross, TJX and Dollar General are on the IBD 50 list of elite stocks based on fundamental and technical factors.
Ross and Dollar Tree have racked up 13 straight quarters of double-digit profit growth. Wall Street sees that continuing in their Q2 reports on Thursday.
Dollar Tree, which sells everything for $1 or less, should show a 21% earnings gain to 47 cents a share, say analysts.
Ross' earnings likely rose 27% to 81 cents a share. Don't expect a big surprise: Ross has regularly met EPS views.
TJX said Tuesday that Q2 earnings rose 24% to 56 cents a share, beating estimates by a penny. Sales rose 8.7% to $5.946 billion, missing forecasts.