Discount Retailers: Traffic & Sales Up

On Friday, we'll get an update to the University of Michigan's July consumer confidence index. The preliminary survey showed waning belief in the prospects for recovery. Sustained weakness in the future expectations gauge could be a bad sign for consumer spending.

Though frugality is a problem for many retailers, not all are struggling. In fact, some continue to thrive thanks to the ongoing frugality, as can be seen in the positive earnings estimate revisions for discount retailers.

More & Bigger Sales for FDO

Leading the group is Family Dollar Stores (FDO - Snapshot Report). The company's record fiscal third-quarter profit of 62 cents per share was 3 cents better than expectations.

Revenues rose 8.3%, driven by a 6.2% increase in same-store sales. The company noted that both the number of register transactions and the average amount of each sale were higher - 2 very bullish signs.

FDO raised its fiscal 2009 profit guidance to between $2.03 and $2.07 per share, versus its previous projection of $1.90 to $2.00 per share. All 16 brokerage analysts raised their forecasts in response, pushing the consensus estimate up to $2.06 per share. Notably, nearly of the covering analysts also raised their fiscal 2010 forecasts.

TJX Sees Improved Customer Traffic

The TJX Companies (TJX - Snapshot Report) enjoyed a 4% increase in June same same-store sales. Like FDO, sales were aided by a larger amount of foot traffic.

CEO Carol Meyrowitz expects the momentum to continue throughout July. As a result, she now anticipates that second-quarter earnings will total between 56 and 59 cents per share, instead of the 43 to 49-cent per share range she had previously predicted. Not only did analysts adjust their second-quarter forecasts to 59 cents per share, but the majority of them also upped their full-year projections.

The new 2009 earnings estimate is $2.30 per share, 17 cents above the average forecast of a month ago.

Ross Stores Significantly Raises Guidance

Ross Stores (ROST - Snapshot Report) made it a trifecta, by recently announcing a 1% increase in same-store sales. The company said dresses and shoes sold particularly well.

CEO Michael Balmuth thinks second-quarter profits could now total between 73 and 75 cents per share, a significant increase over the previous projection of 60 to 63 cents per share. Like TJX, the majority of brokerage analysts raised both their second quarter forecasts (the consensus stands at 74 cents per share) and their full-year projections. The new full-year forecast of $2.82 per share is 11 cents above the average estimate of a month ago.

Margins Helping

A common theme for all 3 companies, in addition to the higher same-store sales, was an improvement in margins. All of them did an effective job of keeping inventories at manageable levels, which prevented the need to aggressively mark down merchandise.

FDO, TJX and ROST are all Zacks #1 Rank ("strong buy") stocks and are classified in Retail-Discount Variety. This group also contains Zacks #1 Rank stock Dollar Tree (DLTR - Snapshot Report) and Zacks #2 Rank ("buy") stocks 99 Cents Store (NDN - Snapshot Report), Fred's (FRED - Analyst Report) and Sears Holding (SHLD - Analyst Report)

The Zacks Industry Rank List can be viewed at http://www.zacks.com/zrank/zr ank_inds.php. This interactive list allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. Shown below is the Zacks Sector Rank List, which shows the trend in estimate revisions on a broader scale.

Charles Rotblut, CFA, is the senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com.