24/7 Wall St.

The rise in the dollar store theme was supposed to be secular. As consumers have been looking for any and every way to save money, dollar stores started pursuing a “reaching” approach — selling goods that were not just $1 any longer, say to the $5 and $10 per item. This was often coming at the expense of Wal-Mart Stores Inc. (NYSE: WMT).

24/7 Wall St. has tracked the rise of dollar stores. This theme has run into some issues in recent months, but one such issue may have been that the stocks of Dollar General Corp. (NYSE: DG) and Dollar Tree Inc. (NASDAQ: DLTR) had risen too much. we even named Dollar General as being one of 10 stocks to own for the whole decade.

Several years ago, we showed how the dollar stores were taking handily from Wal-Mart, showing that they were at the same stage as Wal-Mart was in back in the 1990s. Still, we also surmised that the dollar stores would never equate to Wal-Mart. Now Wal-Mart is fighting back and the Dow Jones Industrial Average stock — oh, and the world’s largest retailer — is fighting back to recapture retail market share.

One key issue to consider is that Wal-Mart’s performance has been stellar in 2016. Sure, that was after a dismal 2015. Wal-Mart is the third best Dow stock so far in 2016 with a 19.5% gain. Now look at Dollar Tree and Dollar General: the former is down 1% so far in 2016 and latter is down 4%. From their 52-week highs, Dollar General is down a sharp 30% and Dollar Tree is down 24%.

Now consider the market caps and expected revenues in relative positions. Wal-Mart, again as the world’s largest retailer, is worth a whopping $223 billion, with expected revenue of $487 billion this year. Dollar General is worth $19 billion in market cap, with an expected $22.1 billion in revenue this year, and Dollar Tree is worth almost $18 billion, with expected revenues of $20.9 billion.

Analysts have been playing up Wal-Mart so far in 2016. Some of these calls feel late after a serious recovery. They also have been rather negative on the top dollar stores.

October 5 brought a positive view from Credit Suisse on Wal-Mart, reiterating its Outperform rating and its $80 price target. That would imply upside of 11.5% just in capital gains, plus another 2.7% in dividend yields. Credit Suisse said that Wal-Mart’s upcoming analyst meeting will be a key data point for staples retail. The firm sees management updating several “billion dollar price cut initiatives” and cutting costs sooner than expected.

On the theme of Dollar Stores in general, Credit Suisse sees both Dollar Tree and Dollar General as unlikely to leave the penalty box anytime soon. They expect Wal-Mart’s analyst day to be a negative for those dollar stores as well. Intensifying competition, grocery competition, accelerated promotions (that means discounts and sales) and even the fading impact of cheaper gas are all wearing on these companies.

Credit Suisse believes that consensus estimates still seem too high for both of these formerly high-flying names, with comparable sales and margins under pressure. They said that Dollar Tree’s stock seems to offer additional downside as it becomes more evident that the Family Dollar turnaround will prove challenging.

On Dollar Tree, Credit Suisse kept its Underperform rating and the firm cut its target price to $69 from $76. Dollar Tree pays no dividend, and it has about $7.3 billion in long-term debt.

Dollar General is said to have risk also, but Credit Suisse believes that risk now looks largely washed out. Dollar General’s rating was maintained as Neutral, but the target price was lowered to $70 from $80.

Credit Suisse shows that the staples retail competition in general is clearly another issue. They also see the low income benefits now lapping as well. The report said:

Dollar stores compete with all staples retailers. The recent ramp in promotional activity in conventional grocery represents another issue that was only just beginning at the end of August when these companies provided their latest update.

Lower gas prices now look to be lapping while SNAP benefits have seen some reduction. Our analysis of a typical $40,000 income household indicates that the net tailwind from external factors other than wage growth is essentially gone.

This may bring up some serious concern for the endless growth story of the dollar stores. That being said, the two dollar store giants are down 25% to 30% from their highs.