Dahlman Rose bullish on value retail

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Bangalore (Reuters) - Discount retailing is likely to stay popular with consumers, who remain pressured by high unemployment, rising prices, low wage growth and a difficult housing market, Dahlman Rose & Co said, starting Wal-Mart Stores Inc <WMT.N> and Target Corp <TGT.N> with a "buy" rating.

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The brokerage said the biggest U.S. supermarket chain Kroger Co <KR.N>, discounter Dollar Tree Inc <DLTR.O> and drug retailer Walgreen Co <WAG.N> were its top picks.

But the analysts expect retailers "in the middle" or those lacking scale to get squeezed and said the traditional supermarket format, in particular, will come under persistent pressure.

"While we are generally cautious on supermarket growth, we think Kroger has the business model to take share," the analysts said.

The analysts were also bullish on drug retailers saying an aging of U.S. population will drive growth in drug spending.

The brokerage began coverage of Walgreen, CVS Caremark Corp <CVS.N> and Rite Aid Corp <RAD.N> with a "buy" rating, while starting grocers Safeway Inc <SWY.N>, Supervalu Inc <SVU.N> and Whole Foods Market <WFMI.O> with "hold" ratings.

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(Reporting by Abhishek Takle in Bangalore; Editing by Viraj Nair)