Citigroup's investment strategy is built on the hour-glass theory, or the thought that companies playing to the upper and lower classes will post impressive sales growth as the middle class shrinks. And in light of a recent government report on poverty-stricken Americans, this investment strategy could be immensely profitable. (via Business Insider)
The Somber Facts
The U.S. Census Bureau's October report was released this Monday morning and offered some depressing insight on the nation's poverty levels. According to Bloomberg, "the bureau used an alternate method to calculate that 16 percent of Americans, or 49.1 million people, lived in poverty in 2010, up from the official rate of 15.2 percent, or 46.6 million… The new measure put the proportion of indigent Americans 65 and older at 15.9 percent, an increase from the official 9 percent rate. Among those under 18, the new rate was 18.2 percent, a drop from the official rate of 22.5 percent."
Data was taken using the new Supplemental Poverty Measure which shows how much families spend on food, shelter, clothing and utilities. "It finds that medical out-of-pocket expenses have the largest proportional effect on disposable income of any expense or benefit, and takes into account how geographic differences can alter housing costs."
Here's some hard data on the poverty line: "The annual income at which a family of four — two adults and two children — is considered living in poverty was $24,343 in 2010 under the supplemental measure calculations. That compares with the official figure of $22,113 for the same year," reported Bloomberg. "The ranks of people in poverty, about one in seven Americans, are the highest in the 52 years since the bureau began gathering that statistic."
The Hourglass Theory
As the rich get richer and the poor get poorer, and the numbers in each category increase, it is naturally the middle class that is thinning out. The effect on companies with a focus on the middle-class might become quickly apparent if the trend is not reversed.
Meanwhile, consumer spending on companies catering to low- and high-income classes will likely rise, leading to impressive sales growth.
Citi considered this and thought to put 30 analysts to the task of compiling a list of companies targeting the low-end consumer, and which they expect to outperform next year.
Interested? Here's the list of companies that are publicly traded:
1. AutoZone (AZO, Earnings, Analysts, Financials): Operates as a specialty retailer and distributor of automotive replacement parts and accessories. Current price at $327.11 vs. target price at $377. Implies a potential upside of 15.25%. "Citi believes AutoZone is gaining share in the do-it-yourself market, which will bolster margins. Further aiding the retailer is the increasing age of the American auto fleet. As consumers put off car purchases, and continue to hold onto vehicles longer, preventive maintenance has become more of a priority."
2. Dollar General (DG, Earnings, Analysts, Financials): Operates as a discount retailer of general merchandise in the southern, southwestern, midwestern, and eastern United States. Current price at $39.2 vs. target price at $49. Implies a potential upside of 25.00%. "Dollar General is poised for growth as more middle class consumers trade down as unemployment persists. This year, more than 22% of shoppers came from households earning $70,000 or more a year. The company makes Citi's list for its private label products, rich product assortment, and strong management team."
3. Family Dollar (FDO , Earnings, Analysts, Financials): Operates a chain of self-service retail discount stores primarily for low and middle income consumers in the United States. Current price at $58.92 vs. target price at $70. Implies a potential upside of 18.81%. "The company has embarked on an ambitious renovation program that will hit all stores by 2015. Better assortments and new interiors will boost customer adoption, Citi believes. Beyond current locations, Family Dollar plans to grow footprint by 5-7% each year."
4. Hanesbrands (HBI, Earnings, Analysts, Financials): Engages in the design, manufacture, sourcing, and sale of apparel essentials in the United States and internationally. Current price at $25.69 vs. target price at $39. Implies a potential upside of 51.81%. "Hanes has seen strong growth from its lower priced lines sold at dollar stores and mass merchants, which now contribute 50% of total sales. The company gained 7% of shelf space in 2010, and Citi thinks it could take another 2% in 2011 — putting the label front end center in store aisles."
5. Kraft Foods (KFT, Earnings, Analysts, Financials): Kraft Foods together with its subsidiaries, manufactures and markets packaged food products worldwide. Current price at $35.33 vs. target price at $42. Implies a potential upside of 18.88%. "As consumers cut out-to-eat spending and cook more meals at home, Kraft stands to benefit. Over the past 12 weeks, Kraft has seen retail strength out of dry dinner, lunch meat and cookies."
6. Priceline.com (PCLN, Earnings, Analysts, Financials): Operates as an online travel company. Current price at $509 vs. target price at $700. Implies a potential upside of 37.52%. "The company's Name-Your-Own-Price strategy has made it popular among consumers looking for a deal. Priceline's operating structure has also allowed it to keep costs lower than peers, helping it to expand its hotel network to more than 155,000 locations."
7. Ross Stores (ROST, Earnings, Analysts, Financials): Operates off-price retail apparel and home accessories stores under the Ross Dress for Less and dd's DISCOUNTS brand names in the United States. Current price at $89.62 vs. target price at $78. Implies a potential upside of -12.97%. "The average Ross Stores consumer comes from a household that earns about $50,000 a year, putting it near the bottom of retailers. Ross Stores have also differentiated themselves from TJX's TJ Maxx and Marshall's, helping it drive traffic. The company's recent bump to guidance will help too."
8. Steven Madden Ltd. (SHOO, Earnings, Analysts, Financials): Designs, sources, markets, and sells fashion-forward footwear for women, men, and children. Current price at $35.63 vs. target price at $41. Implies a potential upside of 15.07%. "Steve Madden sells footwear at prices 50-70% less than premium peers, while getting styles to market right after they appear on runways. Citi expects the company's earnings to grow at a 20% rate on the back of supply chain management and value driven price points."
9. Vera Bradley (VRA, Earnings, Analysts, Financials): Engages in the design, production, marketing, and retail of functional accessories for women under the Vera Bradley' brand. Current price at $43.54 vs. target price at $51. Implies a potential upside of 17.13%. "Vera Bradley has succeeded this year on strong product assortment and premium store experience, while maintaining a $30-$50 price point. Citi believes that the company offers a strong competitor to more expensive European brands, which will help it if customers want to trade down."
(By Rebecca Lipman. Quoted data in stock list via Business Insider and Citi)
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