DSN Index soars to record high during 1Q - discount houses retail securities 1st quarter report

Discount Store News, April 20, 1992 by Neil Nordby

Discount store stocks started 1992 on a bullish note and ended on a bullish note during the first quarter just ended. In between, these stocks were the darlings of Wall Street, as investors, both institutional and individual, added them to their portfolios in aggressive fashion.

The result, not unexpectedly, was a corresponding red-hot rally in the DSN Discount Store Stock Index which tracks the financial health of the 64 stocks each fortnight. The box score for the DSN Index in the first quarter of 1992: up a pulse-quickening 439 points en route to a close of 2456.57 after reaching a record high of 2516.22 on March 2 of last quarter. In other words, the discount store stocks enjoyed an average gain of 21.8 percent last quarter as value-minded shoppers flocked to the aisles while profit-oriented investors put in "buy" orders for shares of these retailers.

In contrast, stocks nationwide, as represented by the Dow Jones industrial average and the Standard & Poor's 500, started 1992 off with a bang only to close the three-month period with a whimper. The bottom line at the Dow and S&P: up 2.1% and down 3.2%, respectively.

In other words, discount store stocks last quarter outperformed the Dow by 10-to-1 en route to a rash of record highs.

Indeed, last quarter was one for the memories as many discount retailers closed the books with strong income statements and strong stock gains.

The reason for last quarter's robust results: like the fourth quarter of 1991, retailing stocks once again benefited from investors' shift into cyclical stocks in anticipation of an economic rebound. In the past, these retail issues have led economic rebounds and investors were betting on a repeat performance in 1992.

The result of the above macro economic environment: many retailers posted strong sales growth--especially same-store sales growth--and these results trickled down and translated into burgeoning bottom lines for many of the discount store stocks.

Investors, for example were especially enamored of the little guy last quarter. In fact, of the top five percentage winners in the financial barometer of discount retailers, four of them were stocks that started the new year under $4 a share. Among the winners last quarter:

* Hills was king of the hill, rising a robust 136% before finally coming to rest at $1.63 a share. Hills' fourth-quarter operating net income rose to $1.21 a share vs. a loss of $12.56 a share in the year-earlier period.

* Stuarts Department Stores was next in line, as its stock price swelled 99.9% to conclude the quarter at $1.38. At quarter's end, the company said it sees fourth-quarter profit of $10,000 on sales of $36.9 million and sees a profit for all of fiscal 1992.

* Jamesway had a stellar quarter as well. Fourth-quarter profits rose to 17 cents a share, up from a loss of $1.16 a year ago. As a result, Jamesway's stock took wing, rising 78.6% to $6.25.

The larger retailers were also in vogue last quarter. Take Circuit City, for example. It also was one of Wall Street's favorites last quarter, swelling $9.75 a share to $32.88. Among the goings on at that retailer, which buckled under tremendous selling pressure at this time last year: the company set a regular quarterly dividend of 2.5 cents, February sales rose 35% with same store sales that period up a sturdy 20%, all of which prompted Goldman Sachs and Donaldson Lufkin Jenrette (among others) to repeat "buy" ratings on the stock. Moreover, Circuit City announced fourth-quarter results that were even more attractive, with earnings per share up to 92 cents from 58 cents a share at this time last year. Sales for the quarterly stanza rose 22% overall and were up 8% at stores in business at least one year.

Best Buy was also a best buy on Wall Street last quarter, as its shares rose 56.1% to $25.75. Like Circuit City,

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strong overall and same-store sales triggered the rise in the company's share price. Specifically, fourth-quarter sales at Best Buy were up 57% while sales for the last 52-weeks rose 40%. In fact, in 1991, Best Buy was the best-performing retailer in our portfolio (up 193% for the year to $16.50).

Other recent high-flyers were grounded last quarter by investors looking for new deals to unearth (read Hills, Stuarts and Jamesway). In fact, many of these high-priced stocks felt the unkind glare of Wall Street's spotlight which illuminated those stocks ripe for a rest.

Among the casualties from these recent fast growers:

* Value Merchants topped the largest dollar loser's list, as it fell victim to a huge increase in short selling last month. Short sellers seek to make profits by selling borrowed shares today, in hopes of buying back these shares at a lower price later (ie., the opposite of buy low, sell high). The short-selling pressure was simply too much for the stock to handle last quarter, as Value Merchants fell $9 a share to $21.25.

* Price Co. paused for some much-needed rest and relaxation in the first quarter, before caving in under a deluge of sell orders during the first trading week of the second quarter. Fourth-quarter earnings that came in below analysts' estimates prompted a $14.50 a share sell-off in the stock during the first week of April, as the stock toppled to a close of $31.25. As a result, First Boston, Alex Brown and PaineWebber cut their 1992 estimates for the retailer.