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 Marc Bastow
Discounting 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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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.
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
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
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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