How Discount Shoppers Are Helping Retail ETFs

April 18th at 1:00am by Tom Lydon

Cheap is the new black. The changing face of consumerism is America is leading to a value-oriented shopper, leaving low-cost retailers in a position to prosper, and it is displayed in the performance of retail exchange traded funds (ETFs).

The Family Dollar Store (FDO) is a low-cost retail chain that has fared well in this down economy. It has outperformed other retailers such as Macy’s (M) and J.C. Penney (JCP), as consumers are trading down and wanting their dollar to go a lot further. Most items sell for under $10 in these shops.

Suzanne Kapner for Fortune on CNN Money reports that during this recession most retailers have slashed their earnings, while the Dollar Stores have reported a 6.4% jump in second-quarter sales at stores open more than a year. Moreover, shares are up 28% so far this year and rose 36% in 2008, making it a top performer among the Fortune 500.

Analysts estimate that Family Dollar’s prices are 20% to 40% cheaper than those found in traditional supermarkets and roughly on par with big-box discounters.  What is the secret to the success of Family Dollar’s success? Selling a greater amount of second- and third-tier brands, which cost less and possess greater margins than do first-tier brands – more Gain laundry detergent than Tide, for instance – and by cherry-picking inexpensive real estate in unglamorous locations.

For full disclosure, some of Tom Lydon’s clients own shares of XRT.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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