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Discount retailers still in style

By Steven Syre
Globe Columnist / September 20, 2011

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Companies that help their customers stretch a buck never really go out of style. But many retailers who do exactly that have never been more popular on Wall Street.

Exhibit A: Shares of TJX Cos., the off-price retailer based in Framingham, closed yesterday at $57.59, just 22 cents off an all-time high achieved last Friday.

The company, which owns two well-known chains - TJ Maxx and Marshalls - now boasts the fourth-largest stock market value of any public company in Massachusetts (behind just EMC Corp., Biogen Idec Inc., and American Tower Corp.), and double the value of Staples Inc., another retail leader headquartered in Framingham.

TJX isn’t alone among popular discount retail stocks.

Investors continue to bid up some other off-price retailers, such as Ross Stores Inc., and drive up the shares of bargain basement competitors such as Dollar Tree Inc. and Family Dollar Stores Inc.

Many of those retailers have operated with the wind to their backs ever since the American economy headed into recession more than three years ago.

In fact, I wrote about the long run of powerful business growth and stock appreciation at TJX and some of its competitors early last summer. TJX shares were flirting with all-time high values then.

What’s happened since? TJX stock has appreciated by another 25 percent. Shares of Ross Stores are up 43 percent. Family Dollar stock has climbed 38 percent, and Dollar General shares appreciated 26 percent.

All that appreciation occurred while the overall market moved moderately higher, despite recent stock volatility. Most big stock market indexes have gained about 10 percent to 14 percent since June last year.

Many investors who bought into the idea that solid discount retailers would perform well in tough times think that story still holds up, despite higher stock prices.

“The US consumer is clearly constrained and will continue to be,’’ says Chuck Akre Jr., chief executive of Akre Capital Management. “That constraint stems from employment issues, access to credit, and higher prices for things such as food and fuel. Thematically, all the businesses that sell at off-price and sell necessities - or something close to them - should benefit.’’

But the discount retail stock trend hasn’t been a universal boom. Notable exceptions include shares of Wal-Mart Stores Inc. and Target Inc., which have both lost ground this year, barely budging from their values of June last year. Scale isn’t always a big advantage.

Even among discount retailers popular with investors, the business and economic stories behind their ascent vary.

The rapid growth of retailers like Dollar General and Family Dollar, selling very inexpensive goods - a modern version of the old five and dime - speaks to the serious economic problems of many people trying to make ends meet.

Off-price retailers such as TJX and Ross have increased business by selling something very different - good deals on more expensive clothing and other items with well-known name brands - to another clientele.

Sales rose steadily and earnings per share jumped sharply at both companies through the recession and into the economy’s purported recovery.

Since the end of 2008, TJX stock has earned a total return of 190 percent, while Ross shares gained 182 percent.

“TJX certainly isn’t as cheap as it once was,’’ says Kurt Funderburg, an equity analyst at Harris Associates, whose Oakmark Equity and Income Fund owned 6 million shares on June 30. “But we still think it’s a reasonably good value.’’

Investors who like both companies point to solid retail operations, but also emphasize strong management of balance sheets.

That boils down to making the most of all the cash generated by successful retailers.

One last thing the money managers agree upon: Saving money isn’t going out of style any time soon.

Steven Syre is a Globe columnist. He can be reached at