Checking In on Checkout Lines

In this post, we discuss Dollar Tree (DLTR - Snapshot Report), 99 Cents Only (NDN - Snapshot Report), and Wal-Mart (WMT - Snapshot Report).

With less than a week before Christmas Day, we thought it would be a good time to check in on the retailers to get an idea of how things are going.

Many parking lots were packed at large malls and smaller strip malls. Foot traffic trends appear to be getting stronger after trailing off the first two weeks of December. However, shoppers are searching for the best deals and only responding to the biggest markdowns.

The bigger the markdowns, the more shoppers are interested in buying. As we move closer to December 25, we expect to see this promotional activity increase. Typical promotions include buy one get one 50% off; take an additional 50% clearance items or already marked down items; and everything 50% to 70% off.In addition, here a few trends we will be looking at throughout the holiday season:

• Markdowns. Consumers are still buying the heavily discounted merchandise. Will consumers be willing to buy a full price again? Not likely. We are now in an era of frugality, and consumers will continue to shop for deals.    
• Margins. Cleary, the heavy discounts are eating away at retailers’ profit margins. We see little chance for retailers to surprise on the upside here. The best three words to describe fourth quarter profit margins: Stink, Stank, Stunk.    
• Inventory Levels. Retailers have worked to reduce inventory levels for the last four quarters. Still, we saw several stores with way too much inventory, and most of that was marked down. Look for deeper discounts beginning December 26, as retailers look to clear the decks before heading into 2009  
  
• Discount Stores. Stores such as Dollar Tree (DLTR - Snapshot Report), 99 Cents Only (NDN - Snapshot Report), and Wal-Mart (WMT - Snapshot Report) continue to outperform all other areas of retail. Customers are trading down and looking to stretch their dollars. This trend will continue into 2009.    
• January Effect. Despite all the negative news, retail stocks could see a nice pop in January. Reasons for a potential rally? Take your pick: oversold, bad news already priced in, very low expectations, talk of recovery this summer or an Obama stimulus plan.

Read the full analyst report on NDN.

Read the full analyst report on WMT.