Product and Service
Companies included in discount stores sector primarily are discount retailers selling consumables, seasonal items, and home products and apparel.
Demand for Product and Service
As indicated by typical sales data, the demand for discount merchandise has been very strong and growing quickly in the past several years driven by mark-on and traffic. It seems that sales performance of companies have been increasingly related to the performance of their lower pricing items. Developing new areas/stores also plays an important role in companies’ performance in in-store sales.
Sector’s current, trend, causes behind trend, and future
Current and Trend
- Generally, performance of companies in this sector has been better than most of retailer in mass-merchandise sector in the past several years as indicated by their continuously increasing comparable sales.
- While we have not seen an apparent trend in decreasing traffic, data indicates that the recent growth in comparable sales of typical companies in this sector has been increasingly dependent on mark on of price.
- Undeveloped and unreachable areas seem to be contributing to keeping quick growth of companies in sales as reflected by the fact that companies have kept opening new stores.
- We have seen declining merchandise costs and rising price/less mark down in the past several years.
- The lower pricing items seem to have been less impacted by unfavorable retail industry climate, as characterized by slowing down traffic in the stores, than higher pricing items.
Causes behind the trend
Economy and demographic factors have helped drive growth in demand for merchandise products.
If the slowing down traffic in mall/stores across retail industry is a result of shifting of transaction to online stores, the discount retailers have obviously been immunized due to the price of their items, which are too low to cover shipping costs.
Continuously slowing mall traffic may still be giving negative impact on companies in this sector due to decrease in random visits, which may explain the recently slowing growth in sales of some of companies in this sector.
Supported by favourable factors from macro-economy and demography, demand in this sector may continuingly go up.
General Financial Performance of Companies In the Sector
It seems that demand for products and service of companies in this sector has been very strong as indicated by growth the same store sales (average 3-4% annual growth rate) in the past several years, which can be attributable more on increasing transaction size (mark-o) than increasing transaction counts. Growth has also come from expansion of reach of stores. It seems that traffic was able to quickly catch up in newly opened stores. The lower pricing items seem to have been less impacted by unfavourable retail industry climate, as characterized by slowing down traffic in the stores, than higher pricing items. It seems that the traffic may be slowing in 2018 as indicated by smaller increase or decrease in transactions and thus the smaller comparable sales growth in 2018 compared with 2017.
As a result of lower merchandise costs and rising mark-on, we have seen about 150 basis points increase in gross margin from the typical companies (around 34% in 2018). The typical operating margin is now at about 13% (with a large range of 8-23%) with a SG&A as percentage of sales of about 21%. The average operating margin seems to go down slightly in 2018 probably due to lese mark on resulted from pressure of slowing traffic.
The typical average stock Price/cash flow ratio is: 25(interest/EBI ratio of 15%) and stock price/sales ratio is about 2.0.