24/7 Wall St.

Dollar stores are still king… Unemployment is expected to remain high, or at least ‘under-employment’ will reign as a continued theme ahead.  This presents a challenge for many retailers out there which are seeking to regain their former peak sales from 2008 and before.  The trade-down economy and the grab-up approach from dollar stores almost secures the sector’s growth ahead as a boost for the lower-end retailers.  We had previously noted that the dollar stores were in about the same exact place that Wal-Mart Stores Inc. (NYSE: WMT) was in… at least where Wal-Mart was back in 1990.  The sector could ultimately challenge Sears Holdings Corporation (NASDAQ: SHLD) and drug stores if trends continue.

Opinions vary over the fate of dollar stores.  A research call from Nomura highlights the dollar stores, and plays into our theme of dollar stores ahead. The research call appears to have been misquoted by some news services.  Nomura did initiate this portion of the retail sector as Neutral, but the ratings on Dollar General Corporation (NYSE: DG), Family Dollar Stores Inc. (NYSE: FDO), and Dollar Tree, Inc. (NASDAQ: DLTR) were all started as BUY ratings.  The Nomura research adds that dollar stores are acting as the trade-down but also noted that the stores are grabbing up now that not all items are truly $1.00 or under.  This is much of the same thesis we have at 24/7 Wall St. on the growth of dollar stores in the years ahead.

Nomura started coverage on three players.  Dollar General Corporation (NYSE: DG) was started with a Buy rating and a $35 price target.  Its shares are down close to 10% from the peak and the 52-week range is $21.30 to $31.41; this implies upside of almost 25% and Thomson Reuters has an average analyst target price of $33.64.  Family Dollar Stores Inc. (NYSE: FDO) was started with a Buy rating and a $63 price target.  Family Dollar shares are at $47.00 after hitting a 52-week high of $47.42 today. Nomura’s target implies more than 34% upside despite that Thomson Reuters had a prior average analyst target of  closer to $48.00.  Dollar Tree,Inc. (NASDAQ: DLTR) was started with a Buy rating and a $68 price target.  When you consider a price around $52 today after a new 52-week high of $52.76 today, this still implies upside of close to 35% despite a Thomson Reuters prior average analyst target of about $53.00.  Dollar Tree also just made an acquisition up in Canada.  Nomura discussed significant sale gains from dollar stores in general against retail and expects that 5% to 6% sales growth is possible for the next 10 years.  99 Cents Only Stores (NYSE: NDN) was not covered today by Nomura, but this one has gotten it wrong over and over and continues to be a dead-money stock.  When dollar stores were booming this year, it still struggles with a $15.00 share handle.

The thesis behind the future growth of dollar stores does tie directly into Wal-Mart and now into Sears in our own outlook.  Wal-Mart’s 2000 Annual Report shows that sales were $165 billion, and that compares to $25.8 billion per the 1990 Annual Report.  The dollar store leaders combined today are still only where Wal-Mart was in 1990 on a basis that is not adjusted for inflation and cost of living changes.  A tenfold rise in dollar store sales over the next one or two decades is not likely in the cards.  Sears Holdings Corporation (NASDAQ: SHLD) has been a confusing situation for some time, and now the company seems to be the big Lay-Away advertiser for the holiday season ahead. If advertising lay-away is not a grab down, then nothing else is.

Wal-Mart’s stock has traded from $40 to $60 for a decade and it was in the 1990’s that its shares rose about tenfold.  That performance has not exactly been seen by the dollar store sector, yet.  There are some interesting share price comparisons to consider.  Dollar Tree is up now over 200% from the lows in the last 5-year but up only about 100% since the highs of 2000 to 2001.  From before 1996. the shares are up more than tenfold.  99¢ Only Stores has still had a hard time getting and staying above $15.00 since 2004, while it used to be a $20 and even $30 stock earlier in the decade. Dollar General has pulled back nearly 10% from highs, but shares are still up almost 25% from the re-IPO of 2009. Family Dollar rose almost 20-fold from trough to peak during the 1990′s, and its shares hit a 52-week high on Wednesday and the stock is up nearly 75% from the year’s lowest prices.

Dollar stores have an implied and mandatory price target for their goods.  While not all are truly $1.00, the theme here is “Always have dirt cheap prices” regardless of what is going on at Wal-Mart, Sears, and elsewhere.  Wal-Mart was supposed to be the winner of the recession; Sears may be trying to compete for that now in some aspects.  At the end of the day, or maybe at the end of the next decade, the growth of dollar stores will likely not ever equate a Wal-Mart.  If the public dollar store sector manages to double in the coming years, the sector may only pass Sears at $44 billion in its latest annual sales if the company does not get back on growth.  The question of valuation is always a fair point to address after large runs higher and after many 52-week highs are put in. Still, there is major room for growth in this sector.

JON C. OGG