Investment Contrarians

Why I Continue to Favor the Discounters

By for Investment Contrarians |

retail sectorI recently discussed the upcoming key holiday shopping season that officially begins with the critical Black Friday on November 23 and its importance to the retail sector.

Discounter Target Corporation (NYSE/TGT) reported a slower rise in sales in October and will be betting on the holiday shopping season when some retailers can generate up to 40% of the company’s total annual sales. (Source: AP, “Target October sales figure rises,” Yahoo! Finance from The Associated Press, November 1, 2012.)

Consumer spending drives the retail sector, economy, and gross domestic product (GDP) growth.

Retail sales for October, excluding drugstores (comprising of 18 national retailers polled by Thomson Reuters), surged a better-than-expected 4.7% versus the estimate of 4.3%. (Source: “Retailers Report an Upbeat October,” The New York Times, November 1, 2012.)

The pickup in the retail sector is encouraging; and with the current decline in gasoline prices, the pickup in jobs, and the growing strength in the housing market and prices, retail sales could be strong.

I believe the department stores and some of the specialty retailers will fare well; the key for success in the retail sector is selective picking.

My advice is to continue to stick with the leading discount bellwether retail stocks. In the large-cap retail sector area, the top companies are Wal-Mart Stores, Inc. (NYSE/WMT), Target Corporation (NYSE/TGT), and Costco Wholesale Corporation (NASDAQ/COST).

Costco reported a seven-percent jump in its key same-store sales reading in October, as reported on its web site. The results continue to show steady growth; but for that extra bit of growth, you should look at the smaller discount companies in the retail sector.

Costco, for instance, has a market cap of $42.0 billion and is estimated by Thomson Financial to report sales growth of 6.6% and 8.2%, respectively, for the 2013 and 2014 fiscal years.

By comparison, take a look at small-cap PriceSmart, Inc. (NASDAQ/PSMT), an operator of 28 warehouse clubs in 12 countries in Central America and the Caribbean. PriceSmart reported a 10.0% increase in its same-store sales for the four weeks to September 30, along with a 14.1% year-over-year rise in September net sales. These are well above the growth metrics for Costco.

Consider the comparative sales growth for PriceSmart by Thomson Financial, which is 19.2% and 15.4%, respectively, for the 2012 and 2013 fiscal years—higher than Costco. The growth estimates are probably conservative and could really take off if the expansion continues.

Another interesting discounter is large-cap Dollar General Corporation (NYSE/DG), which operates over 10,000 stores across 40 states. Dollar General has reasonable valuation and above-average, long-term price appreciation potential for investors looking at the retail sector.

And when the housing market and jobs numbers pick up, I expect consumer spending in the retail sector to continue to increase, especially on non-essential goods and services.

My favorites in the retail sector continue to be the discounters and big-box stores. The big-box stores are now selling a broad range of electronics and are adding to their product lines; they offer consumers a one-stop place for shopping and higher revenue flow.

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