Dollar stores win as Wal-Mart fumbles

The retail giant is suffering from empty shelves and high inventory, and shoppers looking for bargains are going elsewhere.

By InvestorPlace Oct 3, 2013 12:48PM

Manager Doris Oransky arranges merchandise at a Dollar General store in Arvada, Colorado on June 2, 2009 (© Rick Wilking/Newscom/Reuters)By Marc Bastow


iplogoDiscounting king Wal-Mart (WMT) is under some duress, and while you might not have noticed, dollar stores sure have.


As the U.S. economy continues to crawl ahead, many consumers still are holding back on spending and are looking around for the best bargains available. And while you'd think that ultimately would benefit Wal-Mart stock, you'd be wrong.


In fact, Wal-Mart actually is cutting back on orders for the remainder of the year as it looks to shed its piling inventory. Meanwhile, back in August, Wal-Mart knocked back its revenue growth target for 2013 to the 2% to 3% range, down from 5% to 6%.


No wonder, then, that Wal-Mart stock is up just 8% this year and woefully underperforming the market.


However, Wal-Mart's misfortune is enriching another set of retailers: dollar stores. The business -- including prominent stocks Dollar Tree (DLTR), Dollar General (DG), and Family Dollar (FDO) -- is thriving.


For the year, Dollar Tree shares are up 41%, and Dollar General has moved ahead 29%. Family Dollar, which lags the rest of the major dollar stores, still is nearly lapping Wal-Mart with 14% gains in 2013.


The dollar stores are taking advantage of a change in consumer behavior referred to as "small-basket convenience trips" in which consumers typically purchase seven or fewer items in a short period of time. More customers -- particularly those in rural areas -- are looking not only for low prices but this low-volume shopping experience.


And they're finding dollar stores a better place than Wal-Mart for this fix.


Additionally, dollar stores have for years been improving their offerings, now stocking food products -- including meats, fruits and vegetables -- and more brand names its consumers know.


That has translated into success in their most recently reported quarters: Dollar General sales increased over 11%, with same-store sales growth of over 5%. Dollar Tree saw an 8.8% growth rate along with same-store sales improvement of 3.7%. And Family Dollar clocked in with a 9% rise in revenue and nearly 3% growth in same store sales.


But if you're not in these dollar stores' stocks already, don't worry -- all three can continue to grow.


Piyush Aurora at Motley Fool points out that by the end of fiscal 2013, Dollar Tree expects to open up more than 300 new stores, Dollar General 500, and Family Dollar more than 600. While none of the figures represents a huge jump from recent annual growth rates, the point is that they're still expanding store count -- something the already sprawling Wal-Mart now has difficulty doing domestically.


Wall Street is pretty optimistic on the prospects of DG, DLTR and FDO, too, with all three trading at price-to-earnings ratios in the mid- to high teens. So investors at the very least seem to expect some moderate growth out of these companies.


But the biggest argument is still the broadest one. With wages continuing to stagnate, and unemployment and underemployment still a persistent problem, dollar stores' price is right.


As far as long-term investments go, FDO, DLTR and DG are all worth a look.


Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities.


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245Comments
Oct 3, 2013 1:25PM
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Not hard to see that one coming........The little guys have beaten Wal-Mart at their own game.  Though I personally think Dollar Tree is the best of the bunch  (Cleaner, more spacious stores, better selection), I wonder what happens when they can no longer sell "Everything for a Dollar"  Could be a problem.

Oct 3, 2013 2:22PM
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speaking of Wal-Mart here is how they work from a former employee who knows the truth , if you work hard you can move up in to a bunch of headaches when and if you are offered a chance to move up and if you chose not to take it then that's when the fun begins !! constant harassment they will write you up for the smallest of things. now if you are lazy and have no kind of work ethic and don't ask for raises then you will have a life time job.

as a former produce dept employee with Wal-Mart here is a fact they buy so cheap and then they hike it up 300% on customers . thats why I like the dollar tree dollar general and so on

Oct 3, 2013 2:37PM
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every time i've shopped at walmart it's a nightmare. they have entire sections closed off so you can't even get to things. they have pallets and boxes and carts and people blocking everything everywhere. sometimes you can't find the same things for months. as soon as walmart came here they put all the local mom and pop stores out of business so it's nice to see them have to take a big dose of their own medicine. i hope they overdose on it too.

Oct 3, 2013 1:24PM
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Walmart consistently chooses to pay its hourly associates bare minimum wage (which should be raised) and only provide the majority of those associates with "part-time" hours. As such, most of those associates will fall below the poverty level,especially if their income is their sole household income, thus qualifying the associates (and dependents) for many government subsidy programs. The taxpayers, which are also those very same associates, will pick up the burden. Some studies suggest that just one Walmart can cost the taxpayers as much as $900,000 per year (Huffington 2013)

Walmart is not only hurting the economy with the aforementioned practices, but because most departments in most stores are now understaffed, they are also hurting themselves, and their stakeholders by not being able to keep stock (which is on hand) on the shelves, thus helping to inflate the value of Dollar General, Dollar Tree, and Family Dollar.

Huffington 2013. http://www.huffingtonpost.com/2013/05/31/walmart-taxpayers-house-report_n_3365814.html

Oct 3, 2013 1:55PM
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With our economy still not recovering fully from the great recession as the Washington propaganda has lead us to believe, people have had to turn to cheaper retail buying. There are more Dollar General stores almost on every corner than Walmart can keep up with. Available jobs are still not at their full potential and people are still struggling to make ends meet. Look at what's happened in many cities where unemployment is still high? People have to watch their spending and the dollar stores are their only solution at this point.
Oct 3, 2013 2:16PM
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Yup, you got it right, That's exactly what I have been doing for the last 6 months. Walmart refuses to provide the small shopping basket for me, so I go where I can fine one and spend my Walmart dollars there...
Oct 3, 2013 2:02PM
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This is proof that America has had enough of Wal-Mart and it's cheap Chinese products that take away thousands of American jobs.  I hope Wal-Mart fails miserably and the Dollar Stores continue to grow.  I would not enter a Wal-Mart if my life depended on it.
Oct 3, 2013 4:47PM
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I'd say the biggest problem is that walmart has 70 checkout lines at every store and only 2 cashiers. So I go in to buy 2 or 3 things and get stuck in line for half an hour behind a dozen families buying all their groceries for the month. No thanks. I avoid that place like the plague.
Oct 3, 2013 2:04PM
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I always hit the 99 cent store & Dollar Tree first, before going to Wal-mart & usually find what I need there.
Oct 3, 2013 2:13PM
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I notice the Walmart store near me isn't very busy lately, but Dollar Tree is always busy.  I have also noticed the quality of Walmart and Kmart clothing is absolutely horrible.  The first day I wore a pair of Walmart pants, the outside seam came open, to my embarrassment because I was at work.  I have also had the hem of a sleeve come apart.  With Kmart, you wash an item once and all the color runs out of it.  Maybe I'll just start making my clothes again.  
Oct 3, 2013 2:05PM
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There are two Dollar Tree stores in my area.  Unfortunately, the one furthest away has refrigerator and freezer cases with an extensive amount of food choices.  The Dollar Tree closest to me doesn't have any food cases, but it's great anyway.  Today I bought trash bags at Dollar Tree, then I went to the supermarket in the same parking lot.  The supermarket sells the same rolls and some other things, but they are quite a bit higher in price.  They were probably delivered to the Dollar Tree and supermarket on the same truck.  
Oct 3, 2013 2:30PM
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I like the convenience of the Dollar general in my town. It is closer than Walmart and gas is so expensive, I'd rather frequent a local store. I have another grocery store too near me I frequent and buy the sale items there. So Walmart has lost alot of business from me because of the convenience of a local store.
Oct 3, 2013 3:51PM
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I enjoy shopping in the small dollar stores- they remind me of the old 5 and 10 stores when I was a child. They are easy to access and quick to get in and out of. Their prices are very competitive with the big stores- especially on groceries. You can find nearly anything there- except meat and produce. WalMart is always a zoo to visit and I only go there when there is no other option.
Oct 3, 2013 3:49PM
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The only true dollar store in this story is Dollar Tree.
Oct 3, 2013 2:25PM
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If you could buy the same horrible crap at a dollar store for probably less why wouldn't you? Plus you won't' be supporting the horrible Walmart family.
Oct 3, 2013 2:29PM
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Do Dollar Tree, Family Dollar, and Dollar General stores pay higher wages? Just curious. Everyone slams Wal-Mart for its wage policy, so is there a difference between the discounters? I was at a Wal-Mart this morning (only going once or twice a year)  and noticed fewer items being stocked, less shelving space, wider aisles, and fewer people.
Oct 3, 2013 2:05PM
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I'm happy for the dollar stores.  I do dislike, however, their asking me to "donate" my change to literacy or any other cause.  We pay taxes for education. CONgress has ruined education.  The teachers are not at fault.  They can't teach and do all the reports and required junk that lawmakers demand of them and of the prinicpal's office and of the central office and of the state education agencies.  I hope the government will make a complete shutdown but I know that won't happen.  The clowns in clown town won't let that happen.  But, they are so unproductive!!
Oct 3, 2013 3:35PM
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I never paid much attention to Dollar Stores before this article...even though there are 5 stores close enough for me to drive to.  Guess I'll be paying more attention to them now though!
Oct 3, 2013 6:25PM
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I wouldn't set foot in wal mart for any reason. even though I live on my social security check, I go to aldi's or cub foods for food and target for whatever else I need. wal mart is an arrogant retailer that thinks they are the very best. they put thousands of small businesses out of businessin small towns. sam walton would be horrified to see what has happened to his dream
Oct 3, 2013 3:43PM
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As a former employer of a huge clothing supplier to Wal-Mart and Dollar General/Dollar Tree, I advise everyone to not be so quick siding with the dollar chains.  In my experience, Wal-Mart was by far the more honest, respectable operation.  *Gasp* But Wal-Mart is the devil!  Strictly business ethics wise, Dollar General was the sketchiest customer we had.  They constantly battled us on payments and did anything and everything to get discounts or dispute orders. 

 

In contrast, Wal-Mart was very demanding, but very upfront with their expectations.  We knew their standards, and if we met them, they held up their end as well.  The dollar stores may be doing well now, but I wouldn't be so quick to dump your Wal-Mart stock for a dollar store. 

 

On a side note, you would be surprised how subjective and undeveloped some of Wal-Mart's replenishment is.  They have strong tools in place, but the people in charge often do not understand the fairly complicated math behind their automatic replenishment system and rely on more subjective methods to replenish stores.  I was a replenishment analyst, and we often ran lean or heavy on inventory strictly because of clashes with the person pulling the levers on Wal-Mart's end.  If they followed their written processes, and used their tools a bit better, the inventory position could improve.  I'm sure it's a HUGE initiative at the highest levels, as it was even before I left my job.

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