How to Invest When the 99% Start Spending Again

Buried in the same-store sales reports that came out last week was an interesting nugget: signs that the average U.S. household has begun to increase its spending.

The Thomson Reuters same-store sales index showed a 6.4% gain in same-store sales -- an apples-to-apples comparison of stores open at least a year -- better than its 4.8% final estimate. But what was more interesting was that most stores reported an increase in the "average ticket," what each shopper spends per store visit.

Walgreen (NYS: WAG) reported same-store sales were down 4.6% but rose 2% in the front end (meaning everything but prescriptions) even as traffic dropped 0.2% because the average basket size grew 2.2%.

Drugstores have had problems with pharmaceuticals, but other retailers of consumer staples are in the same boat. Target (NYS: TGT) last week reported same-store sales were up 7% in February thanks to both higher traffic and what management called "a solid increase in transaction size." Costco's (NAS: COST) sales were up 8% thanks to both higher traffic and a 2.9% increase in average ticket. And Wal-Mart (NYS: WMT) , which has been facing flak after a few weak sales periods, noted in its fourth-quarter report that U.S. stores had squeezed out a 1.5% increase in same-store sales thanks to both rising traffic and higher tickets.

Granted, most increases were modest, in the low-single digits, but together with some other macro numbers, they're a sign that consumers may be shaking off the recessionary woes. Earlier in the economic downturn, many stores managed to keep sales up by slashing prices and offering promotions while at the same time pushing down costs to wring out profits from slim margins. If they can keep running lean and hold on to the traffic, every bit of extra spending will have an outsize effect on profits.

The Conference Board just issued February confidence numbers that showed consumers expecting business to get better in the next six months went from 16.7% in January to 18.7%, and those expecting to see more jobs also rose from 16.4% to 18.7%. More importantly, the consumers expecting their incomes to go up rose from 13.8% to 15.4%.

And the personal savings rate has been dropping after peaking north of 5% in the recession. The latest federal government numbers showed it dropped to 4.6% in January from 4.7% in December. So Americans are socking away less of their income.

Time to double down on the 99%?
The macro environment seems to be turning in favor of retailers despite rising gas prices. Most observers will be watching carefully when the February unemployment rate comes out Friday, hoping more employment means more spending. And you can't overstate the importance of consumer spending on the economy.

Consumers have had their hopes for a recovery dashed more than once in the last four years, so let's not get too excited yet. But for an investor, this could be the inflection point for those retailers that cater to a more modest segment. Before, retail rock stars have been high-end merchants such as Nordstrom.

So is it time to double down on stores catering to the 99%? Yes, if you can get them for a reasonable price. The leaders in the discount area are not trading at a discount, despite their customers' problems.

Luxury players such as Saks and Nordstrom have been showing sales gains since last year. Now it's time for players such as Target and Wal-Mart to pick up some speed. We'll be hearing sales numbers from the drugstores this week. Expect to hear some encouraging talk about shoppers feeling more confident.

Target has gotten a rap for uneven performance on the sales front. As Fool Alyce Lomax noted, February's gain was the best monthly growth in almost five years. But Target has made a lot of investments in store operations and merchandising in that time. Right now, it's trading near the top of its 52-week average and its P/E hovers just below 13, about the average for retailers, so it's not a screaming bargain.

Wal-Mart is in a similar spot, with a similar P/E and near the top of its 52-week range. But it recently increased its annual dividend to $1.59 from $1.46, and as Zacks noted, has a tradition of annual dividend increases since 1974 -- not too shabby.

Costco, as Lomax noted, has been performing steadily throughout. Worth noting, though: Costco's P/E ratio is twice its rivals', so we have to think twice about putting money there.

There are other players such as Dollar General and Dollar Tree (NAS: DLTR) , but investors have been all over those dollar stores since Wal-Mart began to stumble mid-recession. Shares have been bid up so they're no longer undiscovered bargains.

March retail sales will get a boost from early Easter shopping, so expect to see more rising numbers, as long as there are no surprises on the economic front. That should push the retail shares higher.

Keep an eye out for dips, shocks like gas price spikes, or reports of weak housing numbers that can shake a few basis points off the discount retailers' shares. Just wait for a sale.

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At the time thisarticle was published Fool contributor Mercedes Cardona does not own any of the stocks mentioned in this article. She's holding up the personal savings rate. Follow her on Twitter and on her website.We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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