If there is one thing this recession has brought back, it's frugality. It wasn't long ago that words like "thrifty" and "frugal" were frowned upon. Today, living on less has become a hot trend. However, although the current recession will pass, frugality is likely to linger a bit longer in the consumer psyche.
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Numbers Don't Lie
Frugality and the desire to save are appearing in many important numbers. The most obvious, the U.S. savings rate, is firmly in positive territory after being nearly negative less than two years ago.
From an investment standpoint, businesses that are solely in the business of selling cheap goods continue to report strong results. Forget Wal-Mart (NYSE:WMT), which is so entrenched in our society today that it will do well in any environment; there are some other strong contenders that have emerged in this down market and are likely to hold their market share long after the recession has faded.
More for Your Dollar
99 Cents Only Stores (NYSE:NDN) does exactly what the name implies - this company sells everything for less than a buck. It's a billion-dollar company with a net cash position of over $100 million. This company is now starting to turn itself around, however, and looks relatively pricey compared to the others in the space. Nonetheless, investors looking for recession idea businesses might want to keep watch. The company website allows you to take a video tour of the stores. (For more, see 4 Characteristics Of Recession-Proof Companies.)
Recession favorite Family Dollar (NYSE:FDO) is discounting the discount retailers. For the fiscal third quarter ended May 30, Family Dollar reported earnings that were up 36%, easily beating analysts' most optimistic expectations. The company has no net debt, and trades for 13 times forward earnings, which is respectable if profits continue to grow.
The other known players in this space include Big Lots (NYSE:BIG) and Dollar Tree (Nasdaq:DLTR). Big Lots is interesting because you can also purchase big-ticket items like furniture for cheap. It also trades at a more palatable P/E of 12, and produces gobs of free cash flow. Thrift stores like Big Lots and the others spend relatively little on capital expenditures - budget minded shoppers care only about prices and not store appearances.
Bottom Line
All in all, these companies are delivering solid top- and bottom-line growth. Considering the speed with which this recession has taken hold, it appears that the impressive profit growth is a reflection of that.
I would be surprised to see Family Dollar continue to deliver over 30% earnings growth once the recession ends, but I do believe that given consumers' preference for savings, these businesses will continue to grow profits at a respectable rate over the next couple of years. If that is the case, then these businesses could provide excellent growth at reasonable share prices. (For more, see Industries That Thrive On Recession and Recession-Proof Your Portfolio.)
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