Retailers Will Boom With Improving Consumer Health
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The jobless recovery and decreasing home prices have had a very negative impact on households. They are forced to spend less and cut back on a large variety of goods and services. Wal-Mart Stores, Inc. (NYSE: WMT) and Costco Wholesale Corp (NASDAQ: COST) have seen growth over the past couple years as the middle class cuts unnecessary consumption and downgrades to cheaper options. Continued high unemployment rates and decreased earnings would eventually become a negative force for such retailers. The latest economic data is not wholly positive, but it shows consumers, while constrained, are starting to heal. These price conscious consumers have money to spend but still want to save which fits perfectly with the value propositions of smaller discount retailers like Dollar Tree Stores (NASDAQ: DLTR), Dollar General (NYSE: DG), and the bigger discount chains.
Wal-Mart has posted strong revenue and EPS growth over the past 5 years. 4.18% revenue growth and 9.39% EPS growth shows how they have been able to meet the needs of consumers while growing profits. Costco has seen a similar situation with 7.49% revenue growth and 7.61% EPS growth over the past 5 years. While they have not been able to grow earnings faster than revenue, their growth shows the value they provide for the U.S. consumer.
Dollar Tree stores are much smaller than their more famous cousins, but their focus on the lowest end of the market has allowed them to post 10.5% revenue growth and 27.14% EPS growth over the past 5 years. The company does not have the revenue of the bigger retail giants, but its focus on the lowest income sector will be a positive factor as more families and individuals drop out of the middle class and remain in near poverty. Dollar General had their IPO in 2009 so growth is examined over the past 3 years instead of 5. The company posted revenue growth of 9.91% and EPS growth of 59.47%. The company also focuses on the lowest segment of the market and faces slowing same store growth but in the long term its value proposition will aid the lowest end of the market.
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The Big Picture
The latest economic data shows that although the personal savings rate continues to increase, household debt service payments have returned to the numbers set in 1980. This is positive for discount retailers as it shows that debt payments are not constricting consumers as they were in 2008. If debt payments were a high percentage of disposable income then eventually the consumption of staples would be restricted, regardless of price. With the lowering of interest rates and decreasing requirements for new loans, the period of 1980 to 2005 saw a strong decline in the savings rate. As the chart below shows the personal savings rate is slowly returning from a low close to 0% to a more sustainable range between 6% to 7.5%. The latest data for August states a savings rate of 3.7%. It is a widely known fact that Americans do not have enough savings. The personal savings rate needs to increase if Americans want to retire and discount savings help achieve this goal.
data by YCharts
Putting it All Together
With debt crises throughout the world it is easy to look at the latest debt to GDP ratios and run for the hills. When one digs a little deeper, the numbers show that even in the midst of difficulties consumers are starting to heal. August's savings rate of 3.7% shows that consumers are not near the 7.5% seen in past decades, but they continue to climb above the lows set in 2005. Discount retailers provide cost savings and help consumers achieve the higher savings rate they desire while maintaining their profits. This symbiotic situation points toward long term growth and profits.
MrCanadian1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Costco Wholesale. Motley Fool newsletter services recommend Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.