I thought it would be interesting to chart aggregate retail sales between  two big box discount retailers, a group of deep discount retailers and the quarterly change of the broad U-6 unemployment rate. I chose Target (TGT) and Wal-Mart (WMT) the largest two big box discount retailers. For the deep discounters I chose Dollar Tree (DLTR), Big Lots (BIG) and Family Dollar Stores (FDO), the three companies have a combined market cap of approximately $14 billion, and are all rated BUY by MarketGrader.com. I chose to use U-6 for my analysis, because it includes part-time workers that wish to have full time employment, as well as those that have been unable to find employment and stopped looking for work.

As most people following consumer spending behavior leading up to and through the latest recession know at some point in time the consumer “traded down”.  I’ve attempted to estimate when the consumer traded down, how far they traded down, and have they begun trading back up.  To clarify things in the chart below U-6 was at 8.3% at the end of 1st quarter 2006, and had been contracting since 3rd quarter of 2005 where it was at 8.9%.  U-6, peaked in the 4th Quarter of 2009, but the magnitude of quarterly increases peaked a year earlier, in the 4th quarter of 2008. 2nd quarter 2007 really marks the point when unemployment began to accelerate and aggregate retail sales of all companies listed began slowing.

I’ll break the period of accelerating unemployment growth between Q2 2007 and Q4 2008. During the four quarters prior to this period, Q2 2006 through Q1 2007, TGT and WMT experienced average sales growth of 11.9%, where the deep discounters experienced average growth of 10.4%. During the first half of the period of accelerating unemployment TGT and WMT held up well with an average quarterly sales growth of 8.3%, but the deep discounters dropped to 2.6%. Things began to turn around in the second half of the period for the deep discounters, where their average sales growth modestly increased, averaging 5.6% quarterly growth from Q2 2008 through Q1 2010. TGT and WMT did not share in the same fortune with average sales of 3.68%. The last 4 trailing quarters show greater disparity with 6.1% average growth for the deep discounters and 3.2% for the two big box discounters.

My analysis leads me to believe that once employment began to accelerate, the consumer favored the big box discounters, particularly Wal-Mart. As the recession went on, and the unemployment rate grew, more consumers turned to the deep discounters. Although, U-6 peaked in October 2009 at 17.4%, it is still extremely high as of March at 16.9%, preceded by a rise in January and February. Even if we have an unemployment drop in April, the consumer still appears to be fragile and it looks like these deep discounters will be able to gain market share.

I’ve included a side by side analysis of the three deep discounters mentioned above. This is directly from the MarketGrader.com web, and how I began my analysis. The same side by side analysis can be done on any other U.S. or Canadian companies we cover.

DLTR FDO and BIG side by side