Why Pay More?
Everyone loves a bargain--just look at the prices of the nation’s leading deep-discount retailers.
Shares of 99 Cents Only Stores (ticker symbol: NDN), Consolidated Stores Corp. (CNS) and some others have roared ahead over the last 12 months, easily outdistancing not only mass-merchandise retailers generally but also the broader market.
Some of the stocks have soared 65% or more over the last year, while Standard & Poor’s index of general retailers has jumped 53%.
But with the discounters’ stocks having jumped so sharply, aren’t they now, well, too pricey?
Not at all, argue Brent Rystrom and Reed Anderson, analysts at investment firm Piper Jaffray Inc. in Minneapolis. In a new report, they cite several reasons investors should still be giving the stocks a good look:
The chains will continue to sport solid growth because, despite offering low prices for their merchandise, the stores maintain above-average profit margins. Reason: They pay so little for their goods--often closed-out merchandise--in the first place.
Also, since the retailers already are selling their items so cheaply, they don’t have to worry about slashing prices (and hence their profit margins) to move goods out the door.
In addition, consumer demand for bargain-basement priced items is growing. “Thrift is in” nationwide for shoppers of all economic classes, as “a visit to the parking lot of any of our covered retailers would show,” Rystrom and Anderson said. And the deep discounters “should prove recession-resistant” in the next economic downturn.
Their growing popularity, in fact, is a key reason why Consolidated Stores last month decided to swap nearly $1 billion of its shares to buy Mac Frugal’s Bargains/Close-Outs Inc. (MFI), a Dominguez-based company whose stores include Pic ‘N’ Save.
Consolidated, based in Columbus, Ohio, said the addition of Mac Frugal’s will give it more than 1,000 stores from coast to coast, and annual revenue exceeding $4 billion.
Consolidated currently owns Odd Lots/Big Lots close-out stores, all of which are outside California. It also owns the Kay-Bee chain of toy stores, which are prevalent in shopping malls in California and elsewhere.
Mac Frugal’s (or Consolidated, after the merger closes) is partly “a unique investing play on the [rebounding] California economy,” Rystrom and Anderson said. They noted that Mac Frugal’s California outlets generate higher sales than do those in other states, mainly because of California’s population density and the improved economy.
Mac Frugal’s itself is a turnaround story, having recovered from a disastrous expansion effort in the early 1990s. Its stores now have more brand-name items and better layouts.
But with the merger, the story shifts to Consolidated, which Rystrom and Anderson say is already the biggest player in the close-out retail industry (a position that will be enhanced further with Mac Frugal’s). Consolidated’s stock, at $47.50 a share, has doubled in price over the last 12 months.
The merger might mean consolidation for the industry, but it won’t inhibit Consolidated’s growth, the analysts asserted. “We believe the United States can support a single nationwide close-out chain of 2,300 to 2,500 locations,” which is double Consolidated’s post-merger size, they said.
Another lauded player is Dollar Tree Stores Inc. (DLTR), which is the leader in the market dubbed “single price-point retailing.” Translation: It sells everything for the same price, in its case, $1. The tactic was pioneered by 99 Cents Only Stores, whose 53 stores are all in the Los Angeles area.
Dollar Tree, based in Norfolk, Va., operates outside California and, with 865 stores, is a much bigger player than 99 Cents Only. Dollar Tree says it plans to open 150 more stores next year, swelling its total by 17%.
99 Cents Only Stores, at a recent $28.69 a share, also has been hot over the last year, but the Commerce-based company is still recommended by the few analysts who follow it.
One, Beth Richard of Everen Securities in Chicago, said 99 Cents Only is still attractive because it’s planning to expand outside the Los Angeles area. The company has announced plans for a store in San Diego and is likely to open outlets in Northern California as well, she said.
The biggest disappointment in the sector has been Mazel Stores Inc. (MAZL), a Solon, Ohio-based concern whose stock turned off investors after the company’s quarterly earnings twice came up short of expectations during 1997, Rystrom and Anderson said.
But they still have a “buy” on the stock, saying that Mazel--which operates mostly in the East--”will prove worthy of its challenges” and has “a long and successful history” in selling closed-out merchandise.
However, the improvement will be gradual with Mazel’s “same-store sales” (sales at stores that have been open at least a year) slowly increasing next year.
Times staff writer James F. Peltz can be reached at james.peltz@latimes.com
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A Penny Saved . . .
Stocks of deep-discount retailers are still being touted by some analysts even though the shares have soared over the last year--in good part because of their above-average profit margins. Here how some of the players stack up:
*--*
Ticker Monday 12 mo. Stock Symbol Close % Change P/E* Consolidated Stores** CNS $47.50 +104% 29 Dollar Tree Stores DLTR 38.19 +71 35 Mac Frugal’s** MFI 42.63 +64 21 Mazel Stores MAZL 13.25 -38 15 99 Cents Only Stores NDN 28.69 +114 29 S&P; retail stores index + 47% 24
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* Price-to-earnings based on analysts’ consensus estimate of 1997 earnings per share.
**Consolidated Stores agreed Nov. 5 to buy Mac Frugal’s via a stock swap.
Gross Profit Margins of Discounters, 1996...
Mac Frugal’s: 43%
Consolidated Stores: 42%
Dollar Tree Stores: 37%
99 Cents Only Stores: 35%
Mazel Stores: 34%
Safeway: 28%
Kmart: 22%
Wal-Mart Stores: 20%
Sources: Bloomberg News, Piper Jaffray, Standard & Poor’s
