'Twas The Year Of The Discount Retailer

By Sham Gad | December 31, 2009 AAA

To say that 2009 was a good year for discount retailers is an understatement. Stores that sell ultra-cheap household basics and other wares benefited from record unemployment and a historic era of wealth destruction. But, hey, discount retailers weren't responsible for the mess. In fact, it's a good thing that such businesses came to the rescue of cash-strapped consumers.

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The Standout
You can take your pick of discount retailers and odds are likely that business has gradually improved. Let's start with the most recent business to report quarterly earnings, Big Lots (NYSE:BIG). In early December, the company's net income from continuing operations came in at 27 cents per share, nearly 100% above the year-over-year quarterly figure of 15 cents per share. This marks the company's twelfth consecutive quarter of record earnings from continuing operations. Shares jumped more than 20% on the news. As of early this month, the stock was up 80 percent for the year.

So Far, So Good
Aside from Big Lots, the other deep discount chains enjoyed a decent year, despite slightly underperforming on the S&P 500 going into December. Family Dollar (NYSE:FDO) was up around 15 percent and Dollar Tree (Nasdaq:DLTR) shares were up approximately 15% on the year, with similar results reported for 99 Cents Only (NYSE:NDN). The catch-22 with these businesses is that, while it's good for consumers to be buying products like laundry detergent for a couple of bucks, Mr. Market cares about profits and cash flow. If you can't make money selling cheap, it doesn't matter how good the economy is to you. The biggest irony continues to be Wal-Mart (NYSE:WMT), the giant in discount retailing that all other retailers have to worry about. The company continues to churn out profits, yet shares are down for the year heading into December. Contrarians may want to look at Wal-Mart for next year and beyond.

Bottom Line
I doubt the frugality upon which the American consumer has come to rely in 2009 will disappear anytime soon. This year's rally has been great, but it will likely be years before the damage that created it will be close to being fixed. A great 2009 may be just be the beginning for the ultra-discount retailing space. Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis article, risk free!

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