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Interesting dollar store industry information on how investors in Wall Street
are looking at buying shares of companies that have stocks in dollar store
companies. The stocks of Dollar Tree, Dollar General, and Family Dollar have all
shown positive performance this year and has attracted many wall street firms to
invest in them. The article also describes why people shop at dollar stores at
99 cents only and why more and more independent people want to own a dollar
store in the United States.
Dollar stores' stocks defying the economic downturn
By Matt Krantz, USA TODAY
Recession-wary shoppers aren't the only ones finding big bargains in the dollar
stores.
Investors are, too.
The stock market might be suffering one of its most painful slumps ever, but
shares of stores that sell the cheapest items are ringing up gargantuan gains.
Family Dollar (FDO) shares are up 42% this year, not only bucking the 37% drop
in the Standard & Poor's 500 but ranking it as the top performer in the index.
Dollar Tree (DLTR) and 99 Cents Only Stores, (NDN) while not in the S&P 500, are
doing even better, having soared 46% and 54%, respectively.
Dollar stores — a label they picked up because many of their products sell for
$1 or less — are soaring at a time traditional retailers have been sucked into
the market downdraft. This year, shares of department store chain Macy's are
down 62%, and drugstore chain Walgreen (WAG) is down 38%. Shares of Circuit City
(CC) plunged 60% on Monday alone when the consumer electronics retailer filed
for bankruptcy protection.
FIND MORE STORIES IN: Texas | Hewlett-Packard | Macy | Walgreen | Wedbush Morgan
Securities | Shasta | Big Lots | Cents Only Stores | Family Dollar | Joan Storms
Changing habits
The worse the economy, the better for retailers of deeply discounted items.
Consumers getting used to pinching pennies and saving money are looking for ways
to buy what they need for less. "People were conditioned to spend with credit
cards and home-equity lines," says Joan Storms, analyst at Wedbush Morgan
Securities. "It's not free-flow spending anymore."
That's why Family Dollar reported 8.2% higher revenue in the most recent quarter
and 40.7% higher profit — a period when Macy's (M) revenue declined 3.0% and net
income fell 1.4%. The dollar stores are in a sweet spot because they:
•Sell things people always need. The shelves of most dollar stores are stuffed
with products consumers buy in good times or bad. When gas prices jumped last
year, the dollar stores made themselves more of a regular draw by boosting the
amount of discounted food they sold. Industrywide, these stores added freezer
cases and coolers so they could offer milk and frozen foods as consumers choked
by higher gas prices looked to cut back and make fewer trips.
Family Dollar, for instance, now gets 61% of its revenue from consumables, which
includes food as well as paper, candy, snacks and pet food. Half of 99 Cents
Only's revenue comes from food, says James Ragan of Crowell Weedon. "People will
be shopping for food no matter what," he says.
•Pick up customers and cheap inventory in tough times. The dollar stores benefit
when consumers trade down and shop at less glitzy stores. There's a secondary
benefit, because dollar stores buy overstock and liquidated merchandise from
other retailers, Storms says.
The rising number of bankruptcies has retailers shedding inventory, allowing
discounters to get name-brand merchandise that's being sold at fire-sale prices,
she says.
For instance, in October, Big Lots (BIG) sold $8 million worth of
Hewlett-Packard laptops, Storms says. Big Lots sold them for $599, which was
$350 less than the retail price. If more electronics stores falter, it's an
opportunity for Big Lots to profit from other retailers' woes.
Meanwhile, the dollar stores are finding landlords more willing to cut deals on
real estate or to cut rents, since they're having trouble finding tenants. "Real
estate is available, and landlords have to negotiate," Storms says.
•Are coming off turnarounds. To some degree, dollar stores have weathered their
tough times. When consumers were feeling rich, tapping credit and home-equity
lines, dollar stores suffered and were forced to tighten their belts.
At 99 Cents Only, for instance, the chain has undergone a multiyear
restructuring that has included pulling out of Texas. It also recently raised
its prices and is charging 99.99 cents for everything in the store, up from 99
cents even. That 1 cent extra might not sound like much, but it's a blanket 1%
price increase. Now, with foot traffic rising, many of the steps the stores took
in difficult times are paying off. For instance, 99 Cents Only used to sell
six-packs of Shasta soda for 99 cents. Now, it sells four-packs for 99.99 cents,
Ragan says. "It's still a good value relative to the grocery store," he says.
Upbeat outlook
Not all discount stores are thriving equally. While Big Lots' stock is still up
5% this year, it has lost half its value since August. On Nov. 6, the company
reported sales at stores open at least two years slid 0.2% during the third
fiscal quarter.
But overall, dollar stores should be more insulated to a slumping economy than
other retailers. Even if the economy mends slightly, consumers will hardly feel
rich, says Bernard Sosnick of Gilford Securities. If consumers have extra money,
they're likely to consider buying some of the more discretionary items sold at
the dollar stores, such as snacks or apparel, he says.
Consumers have been adequately frightened by the implosion of home prices,
skyrocketing gas prices and rising unemployment that they're unlikely to return
to their cash-burning ways just yet, says Patrick McKeever of MKM Partners.
"It takes awhile to change shopping behavior on the way down and on the way up,"
McKeever says. "People have been burned. The free-spending years are gone."
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