Deep value discounter 99 Cents Only Stores (NYSE: NDN) reported strong second-quarter 2010 earnings, as their low-price approach continued to find resonance with consumers. 99 Cents' approach has been to gradually broaden out its appeal, both in products and consumer base, with an eye toward making their recession gains permanent after the recession ends. We'll take a look at how they're doing.

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99 Cents' Earnings
The company earned 14 cents a share, or $9.6 million, compared to a loss of 13 cents a share, or a loss of $9.4 million in the same quarter of 2009. Net consolidated sales were $324.7 million compared to $317.8 million for the year ago's quarter. Same store sales increased 2.3%. 99 Cents Stores is now showing positive earnings momentum through the latter days of this recession.

Recession - The Discounter's Dream?
Other deep discounters were able to provide a retail oasis for cash-strapped consumers during the recent bad economic times. Family Dollar Stores (NYSE: FDO) has had a strong, profitable recession, and has a particularly bullish business outlook, as chief executive Howard Levine said the company "continues to target double-digit earnings growth." Family Dollar also sees expansion with new store openings, renovating older stores, and has made inroads into middle-income shoppers.

Dollar Tree (Nasdaq: DLTR), another deep discounter, reported third-quarter sales growth of 6.5%, with sales rising for the month of October by 12.1%, to $1.25 billion. The company is likely to benefit beyond this recession with continued growth.

While 99 Cents and the other dollar stores have been thriving during this mega recession, larger discounters, such as Big Lots (NYSE: BIG) and giant Costco (Nasdaq: COST), have been more mixed, with Big Lots starring while Costco has struggled a bit . Recently, however, this has reversed, as Costco had a 5% sales rise in October, while Big Lots has seen a slight sales falloff in its third quarter.

What Does the Possible Divergence Mean?
Perhaps the recent report of robust luxury retail sales is a clue. While the economy is emerging from recession, nobody knows quite when this will happen completely or whether the consumer will be made whole for his or her return to the fray. The conventional wisdom of the past would suggest that along with increased retail sales industry wide, the migration away from discounters upward toward middle- and high-end retailers would occur. So, in the discount realm, Big Lots would be an upper migration, as would Costco from the dollar stores, yet Big Lots and Costco supposedly would lose customers to Sears (Nasdaq: SHLD), J.C. Penney (NYSE: JCP), Target (NYSE: TGT) and Kohl's (NYSE: KSS) on the way up, and so on. Yet the key contention with the dollar discounters, 99 Cents Stores, Family Dollar and Dollar Tree, is that they have all made inroads - permanent inroads - into the middle-income consumer.

99 Cents Only, Beyond This Recession
This "permanent" hypothesis will be tested during recovery, but the data and the demographics as well as the conviction from 99 Cents and the other dollar discounters has been powerful, both statistically and anecdotally. 99 Cents and the other dollar discounters, including Dollar General which is going public again with its new IPO, insist this is a change in deep discount retailing, and the wounded consumer will stick with them. All have insisted they are executing their long-term plans. The onset of the recovery will test this, though I like what I see from 99 Cents and the others leading up to the recovery. (For more, see Analyzing Retail Stocks.)

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Tickers in this Article: NDN, FDO, DLTR, BIG, COST, SHLD, JCP, TGT, KSS

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