Prices Down Means Profits Up - Now and Then

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Discount chains are attractive to many families who don't have enough money to shop at high-end retailers, but they're increasingly becoming attractive to investors as well. This historical piece offers some great insight on this highly popular industry.

The enormous growth of suburban shopping centers and discount stores in the past decade is reflected in the dramatic rise of E. J. Korvette, whose stock rose from a 1959 low of l7s to a high of 128d in 1961. Even in 1961 you could have bought the stock for 3l1⁄2.

As the discount retail leader, Korvette has benefited from what Eastman, Dillon, Union Securities & Go. called "new consumer spending patterns" by transforming itself from an operator of small discount stores into a regional department-store chain of major outlets to be augmented by a far- reaching expansion program involving the construction of three to four new stores each year. "The company," said Eastman Dillon's S. L. Stirling, "has built an outstanding growth record on the time-tested merchandising concept that everybody loves a bargain."

Korvette's growth can best be attested by its achievement of the highest returns on net worth in the merchandising field. In the July 1960 fiscal year, for instance, it earned approximately $2.8 million on $11.5 million of net worth, which amounted to a whopping 24 percent, compared with an average return on equity for all large U.S. department stores in 1959 of only 7.5 percent. Its sales and per-share earnings soared 7,750 and 7,500 percent respectively between 1950 and 1960.

The discount store, characterized by low store overhead, low mark-up and fast turnover of merchandise, once was considered as a renegade form of retailing. It is now being embraced by such old-line retailers as F. W. Woolworth Co., Allied Stores Corp., S. S. Kresge Co., and Federated Department Stores, Inc. It is also being entered by such mail order houses as Montgomery Ward & Co. and Aldens.

Today, the discount retailer is the center of attention in the retail world, with its volume rising from l960s $2.5 billion to an estimated $4 billion in 1961.

The rising popularity of the discount store is due not just to its low mark-up, but also to many other features, including its attractions of self-service, under-one-roof location and longer store hours. While discounters are frequently charged with selling substandard merchandise, actually they have been able to offer lower retail prices on many classes of quality goods, made possible by their substantially lower expense ratios.

This low expense ratio is achieved, according to Goodbody analysts, through "the high volume of sales generated in proportion to workers employed, square feet of store space, and dollar investment in inventory.

High traffic flow, achieved without proportionately high advertising costs, has given discounters a leverage which has reduced expenses proportionately to sales." Because of its low initial capital investment, a discount store usually becomes profitable in six months whereas it takes about three to five years for a regular retail store to get into profit.

Particularly low in start-off expenses is the discount store with a large proportion of its operations leased to others. Because of its basically leased operation, such a store needs about only $125,000 to open a 125,000 square foot new store compared with about $1,100,000 for a new store operating its own department. This extremely low starting cost renders its new stores immediately profitable and gets its investment returned in about the first six months of operation.

Modern retailers have embraced the discount chain phenomenon, and investment opportunities still exist for the careful investor.

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