The bulk of the growth the discount retail space is seeing is coming from middle-income households, so the way to approach this sector is by looking at the middle 60% and seeing how their shopping patterns have changed over the past couple of years, and the middle 60% income range is becoming much more value seeking, says Dutch Fox, a Research Analyst at FBR Capital Markets & Co.
“Frankly, the entire discount space is really on fire right now. They’re all the seeing remarkably good success,” he said. “The reality is within the discount space, you are not seeing too much of a change in the lowest 20%, they have always frequented discount retailers. And the highest 20%, in terms of income, your wealthier households, for the most part, have really survived this recession fairly well and continue to do what they have always been doing.”
Fox favors Ross Stores Inc. (ROST) because it is in the middle of a longer-lasting secular shift in shopping patterns as people in that middle 60% of income are less likely to make aspirational purchases, and are more likely to seek value. From a stock-specific perspective, he says retailers in this space are compared on a year-over-year basis, and Ross has comped strongly for the past year, as it is trading around 18 times earnings, whereas other comparable retailers are trading at 10 to 12 times.
“I understand that the sentiment is poor right now, but if you look at the hard numbers, we are adding jobs slowly but surely. Consumers’ ability to spend is not fantastic but it’s slowly getting better,” Fox said. “So compared to a year ago — and keep in mind that retailers trade on year-over-year comps — on a year-over-year basis, there really are more people working. There is more money out there for the consumer to spend.”
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