Discount Retailers a Shelter in the Storm (Touch Points)

What a week on Wall Street.

Headlines screamed the failures of familiar names in the financial industry and the Dow Jones Industrial Average lost just more than 7 percent of its value Sept. 15-17.

Just four days after the seventh anniversary of 9/11, the market had its biggest plunge since that fateful and tragic day.

While that memory should certainly remind us things could be worse, it should also serve to reassure us that the U.S. economy has time and again shown its resilience to shocks like terrorism, hurricanes, spiking oil prices and financial scandals.

There is also a reminder that every downturn brings opportunity.

The retail sector has been battered by the decline in household discretionary income as pump prices pick people’s pockets and the collapse of the housing market has reduced equity and shattered consumer confidence.

According to the National Retail Federation, retail sales in August declined 0.3 percent. Back-to-school shopping didn’t provide much of a bump, and the stimulus checks stopped stimulating the economy soon after the government stopped mailing them in July.

Home furnishing stores saw a flat August compared to July and an 8.2 percent decline year-over-year. Electronics and appliances declined 1.3 percent and clothing fell 0.3 percent.

The economy grew by 3.3 percent in the second quarter in a sharp upward revision from initial estimates of 1.9 percent GDP growth thanks to surging exports buoyed by the weakened dollar, but economists warned the U.S. was still heading for a contraction within the last half of the year or first quarter of 2009.

The American Trucking Association reported a 0.3 percent decline in freight tonnage shipped in July, and the NRF is predicting a 6 percent decline in container shipments this year, with 15.5 million 25-foot units versus 16.5 million in 2007.

Cargo has declined in each month, year-over-year, during 2008 as retailers curb their inventories.

So where, again, was that opportunity?

While financials have been battered and the broader index is now down more than 25 percent from its all-time high of 14,164 set Oct. 9, investors — reckoning correctly that folks still have to eat and dress — have put their faith in discount retailers during the last 12 months.

Let’s look at the performance of Wal-Mart, Family Dollar, Target, B.J.’s and Costco.

From Sept. 16, 2007, to Sept. 16, 2008, shares in the five discounters increased 10.4 percent. During the same period, the Dow lost 20 percent of its value.

If you include the broad-based sell-off on Sept. 17 following the government’s $85 billion takeover of AIG, the discount retailers still averaged a 4.35 percent gain compared to a 23.2 percent loss for the Dow.

If you throw out Target — which pitched itself as an upper scale discounter during better times and was ill-positioned for the latest customer distress — the four others combined for a 13.4 percent improvement even after the Sept. 17 sell-off.

Target hit a 52-week high of $68.29 on Sept. 19, 2007, and has lost 21.6 percent of its value since as Wal-Mart regains market share and posts stronger same-store sales.

Its share price is up more than 40 percent in the last 12 months, reaching highs similar to its share price of $63.75 during the last U.S. recession in March 2002.