Should You Stock up on These Retail Stocks?

The three things holding the economy back seem to be jobs, jobs, and jobs. According to a Harris Interactive survey published by CareerBuilder, just 28% of employers surveyed added full-time jobs in the third quarter, down from 32% in the same quarter last year.

This choppy job market weighs on retailers because a segment of their target customer groups simply can't spend as much as they did in the past until they land that elusive full-time job.

Building shareholder wealth one dollar at a time
Dollar Tree Stores is the leading operator of discount variety stores in North America with 4,842 stores. Its unique value proposition is that everything in the store sells for $1 or less.


I used to pass by the Dollar Tree in my hometown thinking the merchandise must be, well, junk. Then one day I checked it out and found that the store stocks a wide variety of quality food products, cleaning products, health and beauty products, housewares, decorative items, and a host of other categories -- all for a buck or less. It's a great retail concept that is a perfect fit for the times in which we live.

According to the company's second-quarter results, lots of other shoppers share my view. Consolidated net sales were up nearly 9% compared to the same quarter of 2012. Because this company is increasing its store count -- it added more than 300 locations in the last year -- the key metric is comparable-store sales. Dollar Tree excelled there as well, recording a 3.7% revenue increase.  

Chief executive officer Bob Sasser happily reported that:  "Sales, customer traffic, average ticket, earnings and operating margin all continue to grow." Operating income for the quarter was $201.3 million -- nearly 11% of revenue -- and up $16.9 million over last year's second quarter.

Dollar Tree ended the quarter with more than $400 million in cash and cash equivalents and a current ratio of approximately 2.3. I missed a number of sessions of my graduate school finance courses due to tee-time related obligations, but as I recall that's a darn good current ratio.   

Not a standout second quarter, but not bad
Big Lots is a large broad-line retailer -- meaning it sells a wide range of brand-name products ,including consumables, furniture, housewares, and toys -- with 1,514 Big Lots stores in the U.S., and 76 Liquidation World and LW stores in Canada.

The company purchases closeout products from manufacturers that seek to reduce inventory. Big Lots' unique value proposition is offering customers prices that are lower than discount stores' prices and well below those of conventional retailers. 

Big Lots reported that second-quarter revenue increased 0.6% compared to the same period of 2012. Comparable-stores sales decreased 1.9% for the quarter, but the company said this was a slightly better performance than it expected.

Income from continuing operations was nearly $32 million, or 2.6% of sales, compared to $38.4 million in the second quarter of 2012. The negative variance was due to a small decrease in gross margin percentage, a 0.3% increase in selling and administrative expenses as a percentage of sales, and $1.9 million higher depreciation expense.

The company's updated outlook for the full fiscal year projects that consolidated net sales will be flat to up 1% and comparable-store sales will be flat to down 1%.

Letting consumers choose to lease, then own, cool stuff
Aaron's has an extremely novel value proposition for consumers: allow them to lease bigger ticket items such as furniture, consumer electronics, and home appliances -- with the option to purchase if they wish.

Its target market is, as the company elegantly expresses it, "credit-constrained consumers." The company's leasing programs allow customers to bring home brand-name products and build their credit history.

In early October, Aaron's said it is reducing its third-quarter revenue and earnings guidance, citing flat same-store revenue, and flat customer growth in company-operated stores compared to last year's third quarter, based on preliminary results. In addition, Aaron's reported that shipments of products to its franchisees were below third quarter 2012 levels. Revenue guidance was reduced by $10 million, or 1.8%.

Chief executive officer Ronald W. Allen summed it up this way:  "Our customers continue to struggle in the current economic environment."

In July the company released second-quarter results that were a bit more positive. Lease revenue and fees were up $21.7 million versus the second quarter of 2012, and franchise royalties and fees rose nearly $700,000.

Operating profit was hampered by operating expenses as a percentage of revenue increasing 1.5 percentage points, and a $15 million accrual for loss contingencies related to pending legal and regulatory proceedings. Net of that accrual, the operating profit would have been $56.1 million for the quarter, which is still a 5.5% drop from the same quarter's results last year.

What we learned
Big Lots' quarterly performance and subdued outlook are not encouraging. In addition, its gross margin percentage has slipped somewhat over the last several years. New CEO David Campisi has only been on the job since the spring and it may take time for his fresh merchandising initiatives, including stocking perishable foods, to show results. 

Dollar Tree gained many customers during the recession, but improvement in the economy does not mean that significant numbers of Dollar Tree customers will leave. Once consumers discover how to save money, they stick with the company that offers these savings. I believe we have a permanent class of newly budget-conscious consumers, so to me Dollar Tree is a great value for shareholders.

With Aaron's we see the dangers of these year-over-year comparisons, because last year the company had record revenue and earnings. For full-year 2012, revenue was up 10% and net earnings rose a whopping 52%. Sort of like a pro golfer who shoots a 59 one day and comes back the next day with a 70 -- still a good score, but disappointing in comparison. Aaron's should do just fine going forward; after all, there's a healthy supply of "credit-constrained consumers" out there.

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The article Should You Stock up on These Retail Stocks? originally appeared on Fool.com.

Brian Hill has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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