Pros and cons for dollar stores in 2013

February 26, 2013

Dollar stores may be entering a more mature growth phase, as they compete head to head.

The easiest growth for dollar stores could be behind them.

Sure, Dollar General opened 625 new stores in fiscal 2012, and plans another 635 in 2013 to eclipse the 11,000 mark.  Family Dollar opened 475 and Dollar Tree opened 395 in 2012.  Of the DG stores opened this past quarter, 58 are larger format with groceries, frozen, dairy, fresh produce, meat and household products—one of the ways it battles Walmart.

But Walmart has its price mojo back.  Dollar stores, which have proliferated since the recession, are now competing head to head.  And food as a traffic driver isn’t nearly as profitable as other categories. Luring shoppers from supermarkets and mass in 2008 was simpler than the prospects they’re facing in 2013.

If the recession was dollar stores’ best friend, investors today wonder about channel performance if the economy improves and people begin to shop less austerely.  No wonder Family Dollar, with more than 7,500 stores, trades near its 52-week low on Wall Street—$56.68 per common share at press time ($53.26 to $74.73 trading range).   Dollar General is in the middle its range at $46.03 ($39.73 to $56.04).  Dollar Tree is at the lower end of its range at $41.89 ($37.12 to $56.81).

Morningstar expects dollar stores to hold onto the shoppers they’ve gained—as long as unemployment remains high and wage growth stagnates. But consumers could “trade out of the discount channel” once prosperity returns, perhaps years from now, it notes.

Dollar store sales could benefit more immediately from a rise in the minimum wage to $9 per hour, which President Obama proposed.  According to Zacks senior portfolio manager Mitch Zacks, this could “result in an annual $3,000 in fresh income per hourly worker. With 20 million of these types of workers, this would essentially mean a $60 billion stimulus, as this new income is likely to be immediately spent. The net result could potentially be positive for businesses that sell to minimum wage people, but it will definitely be negative to businesses that have minimum wage employees.”

Also positive for dollar stores, says Citi Research analyst Deborah Weinswig, is the incremental sales of tobacco products.  Family Dollar started its rollout last May, and Dollar General will start this April.  In the latest quarter, 40% of tobacco transactions at Family Dollar have only tobacco in the basket a sign of new customers she expects to stick.