July 12 - 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 and Target Corp with a "buy" rating.

Entrance to Wal-Mart Store. - photo: corbis

The brokerage said the biggest U.S. supermarket chain Kroger Co, discounter Dollar Tree Inc and drug retailer Walgreen Co were its top picks.

"A more polarized economy means that extreme value retailers are growing and gaining share along with retailers at the very high end of the price/quality trade-off equation," analysts led by Neil Currie said in a note titled "Shopping for Value."

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 and Rite Aid Corp with a "buy" rating, while starting grocers Safeway Inc, Supervalu Inc and Whole Foods Market with "hold" ratings.

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