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Discount Store News, July 22, 1991 by Neil Nordby

Bears Batter Discount Store Stocks In 1990

Investors unloaded discount store issues lock, stock and stock option in 1990, closing out in bearish fashion what was until last year a bullish decade for these stocks.

And it's no secret why discount store stocks hit the skids last year. Few stocks can emerge unscathed from a recession, a war, a pull-back in spending by Americans, brutal competition that forced dramatic price slashing among discounters, tight credit markets, and negative investor psychology.

The result was inevitable: "sell" orders replaced "buy" orders and discount stocks fell dramatically last year.

Consider some of the following numbers from a year to forget for many shareholders:

* Each discount store stock fell over 28% on the average, or nearly seven-fold in comparison to the Dow Jones industrial average which toppled 4.3% for the year. * Of the 61 total discount stocks that are publicly held, only nine stocks closed in positive territory last year, while the other 52 fell in value. * An eye-popping 38 discounters fell by 20% or more in 1990, with Ames experiencing the greatest decline. The bottom line for Ames last year: down 95% to 56 cents (more on Ames later). * But while the industry in aggregate took its lumps last year, nonetheless a number of the smaller concerns garnered some prestigious honors.

Take Price Co., for example. Its distinction in 1990: Price boasted the highest sales per employee in 1990 (see Most Productive Employee chart on page 82). Specifically, Price generated an eye-popping $406,000 per employee in 1990.

Most Productive Employees

                   Sales Per
Company            Employee(1)
Price              $405,843
Costco Wholesale   344,384

Super Valu Stores 265,105

Waban 185,364

Home Shopping

  Network          185,004
Sears              178,254

Highland

  Superstores      162,412
Circuit City       157,983
QVC Network        155,206
Best Buy           154,610

Service

  Merchandise      150,891
Toys "R" Us        137,750

Family Dollar

  Stores           125,912
Fred Meyer         113,857
Ross Stores        111,513
Hills              108,125
Dayton Hudson      100,265
Venture            98,658
Pamida             95,126
Wal-Mart           93,895
Pic |N' Save       92,827
Kmart              88,937
Jamesway           88,675
TJX Cos.           87,367
Dollar General     81,644
Pep Boys           81,484

Burlington Coat

Factory 78,749

Consolidated

  Stores           72,785
Melville Corp.     72,638
Rose's Stores      71,802

Ames Department

Stores 59,553 (1)Sales per employee equals sales divided by number of employees, both as of year-end 1990.

Next in line behind Price stood Costco, whose aggressive expansion campaign paid off in strong sales last year. And like Price Co., Costco also posted strong sales by its employees, posting $344,000 per worker. And Wall Street rewarded shareholders of Costco handsomely as a result of its proficiency, as the share price of this membership wholesaler soared 37% in 1990 to $48.25.

Retailers Rewarded

Wall Street, being the earnings and sales-driven machine that it is, also rewarded those discounters with strong income statements and balance sheets last year. And the one stock that was perhaps most popular with Wall Street, to nobody's surprise, was Wal-Mart.

Among the reasons behind this institutional favorite on Wall Street: the company had the highest Return on Assets of all the discount store concerns in our annual review, 11.3%; Wal-Mart enjoyed the fourth-highest Return on Sales with 3.93%, and was in fifth place in Return on Equity with 24.06%. The result: Wal-Mart's stock rose a stout 35% in 1990 to $30.25 a share.

But unlike Wal-Mart, other perennial favorites could not overcome the economy, war and "sell orders" enough to garner a strong following on Wall Street last year. Consider Toys "R" Us and Melville Corp., which finished first and second, respectively, in Return on Sales, and finished fourth and second, respectively, in Return on Assets.

Occupying the top slots in these two categories normally is a recipe for success for investors, and in years past the combination of the two has indeed spelled success for shareholders in these stocks. But 1990 was a departure from the norm, as these two stocks witnessed considerable selling pressure on Wall Street. For the yearly trading session, both stocks fell just under 6%.

And then there was Ames, which was the worst-performing stock among its discount store brethren in 1990. And one look at its balance sheet shows why investors aggressively sold shares of the company last year.

Poor Showing for Ames

Consider some of the numbers for Ames: the company occupied the bottom rung in Return on Sales (-25.5%), Return on Assets (-49.5%), Sales Per Employee ($59,553), and Return on Equity (-181.57). Ames closed 1990 at 56 cents a share after starting the year with a stock price of $10.38.

Neil Nordby is president of Boulder, Colo.-based Nordby International, a financial monitoring company.