Dollar Tree buoyed by consumer polarisation

Last updated: May 22, 2014 7:27 pm

Dollar Tree buoyed by consumer polarisation

By Eric Platt in New York

A polarisation of the American economy, which has been supportive of top earners but pushed many middle-income earners into more cautious buying habits, was on display as retailers catering to both to high- and low-income spenders outperformed those focused on the middle.

Shares of Williams-Sonoma, the upmarket maker of furniture, and Dollar Tree advanced after reporting better than expected quarterly profits.

The results contrasted with figures from Sears, the beleaguered department store, which continued to struggle through the spring selling season.

It is an investment idea pushed by former Citigroup analysts, who nicknamed it the “hourglass theory”, where retailers at both ends of the spectrum benefit as middle-market chains are squeezed.

Citi analysts noted higher income brackets tended to have lower unemployment and higher consumer confidence, lifting stores serving the market.

That has helped Williams-Sonoma, the operator of its namesake and high-end Pottery Barn and West Elm stores, which forecast 5 to 7 per cent same-store sales growth in the second quarter.

The company lifted its earnings guidance for the full year to between $3.07 and $3.17 a share compared with Wall Street estimates of $3.17.

For the three months to May 4, sales rose 10 per cent from a year earlier to $974.3m, ahead of expectations. Profits climbed 17 per cent to $46m or 48 cents a share.

Analysts at Goldman Sachs, who increased their price target to $72, said the company’s positioning in the market remained “exceptional”.

The results echo those from high-end jeweller Tiffany & Co on Wednesday, which also saw strong same-store sales growth.

At the other end of the market, Dollar Tree said sales jumped 7 per cent to $2bn while profits rose 4 per cent to $138.3m, or 67 cents a share. Earnings were a penny ahead of Wall Street expectations.

Sears did not fare as well. A lack of appetite for televisions and other consumer electronics weighed on the company’s results. Same-store sales at its Kmart division fell 2.2 per cent in the quarter.

Overall, the company’s loss widened to $402m, or $3.79 a share, in the quarter to May 3 from $279m, or $2.63 a share, in the same quarter a year earlier. Revenues fell to $7.9bn from $8.5bn.

Williams-Sonoma shares climbed 9 per cent to $69.49, a record high, during midday trading Thursday. Dollar Tree shares increased nearly 7 per cent to $53.31 by close and Sears shares increased 4 per cent to $38.10 by close.

Shares of JD.com, the Chinese online retailer, surged by as much as a fifth in their debut on Thursday, in an indication investor interest in the Chinese e-commerce market remained robust.

JD.com on Wednesday raised more than expected from its Nasdaq initial public offering, pricing its shares at $19. The company is a cleaner echo of Amazon than Alibaba as it operates its own warehouses and sells goods directly to Chinese consumers.

After the sharp rise in JD.com, shares pared their gains, advancing 10 per cent to $20.90 by close of trading.

Another Chinese-tech company listed in New York was not as fortunate. Shares of Weibo, the Twitter-like service spun out of Chinese internet group Sina, slid 11 per cent to $18.05 after its quarterly loss widened from a year earlier.

In its first set of results since an initial public offering in New York in April, Weibo said revenues more than doubled to $67.5m, matching Wall Street’s forecasts, as sales of display adverts on the social network rose.

The company’s loss, however, widened to $47.3m, or 31 cents per share, from $19.2m a year earlier. Weibo put that down to higher taxes as well as increased spending on marketing and staffing.

Overall, US equities drifted higher as a report showed rising claims for unemployment benefits, although they remained at historically low levels.

The benchmark S&P 500 rose 0.3 per cent to 1,892.49 while the Dow Jones Industrial Average inched 0.1 per cent higher to 16,543.08. The technology-heavy Nasdaq Composite advanced 0.6 per cent to 4,154.34.