Investing

New Economy: Dollar Stores Becoming The Next Wal-Mart (FDO, DG, DLTR, NDN, WMT)

Jon C. Ogg

Today may seem like a poor example of growth and sector dominance when you consider that the news catalyst has a shadow over its peers.  Family Dollar Stores Inc. (NYSE: FDO) beat earnings, but its shares are lower after issuing lackluster guidance.  This is acting as drag on Dollar General Corp. (NYSE: DG), and it is having a muted reaction in Dollar Tree, Inc. (NASDAQ: DLTR), and 99¢ Only Stores (NYSE: NDN) is actually having a green day.  Wal-Mart Stores Inc. (NYSE: WMT) might argue against this notion, but the trend of the current economy is that dollar stores could actually become (or may have already become) the next Wal-Mart.

Family Dollar Stores Inc. (NYSE: FDO) reported that quarterly earnings rose 19% and were $0.77 EPS, which beat Thomson Reuters by $0.01; and revenue rose by over 8% to $1.9 billion, which met estimates. The dollar store chain also said that sales strength continued into June with same store sales showing a 5.5% gain.  The company sees 5% to 7% sales growth this quarter, but the problem came when it projected a profit view below analyst estimates.  The company also said that it anticipates further caution from shoppers.  Family Dollar shares are down over 8% at $36.11 on over 11 million shares so far today.  Interestingly enough, S&P’s equity research just raised the stock to Buy from Hold after earnings.

The big notion about dollar stores being the new Wal-Mart may spark at least some controversy.  It shouldn’t.  If you have a recession, there are still things that have to be bought on the low-end of the spectrum.  And dollar stores of the 2000’s are not dollar stores of the 1990s.  They now sell many food items and consumer staples.  For a buck.  Wal-Mart’s big growth came from two major pushes: a focus on having the lowest prices around, followed by moving into areas where individual and smaller proprietors were natural “targets on price efficiency” or they were just small specialty shops rather than destinations.  In short, Wal-Mart had the lowest prices and it killed many smaller competitors because they could not win even if they were able to compete on price.

Now you have Wal-Mart and the dollar stores which have to become impeccable at managing their entire supply chains so that they can have lower and lower prices.  At Wal-Mart, the trick is that you have to compete on price with Target, Costco, Sears, and other large outfits.  For dollar stores, the price target is fairly self explanatory outside of their ‘higher-end’ items.  It is still funny to ask the cashier at the register how much each item costs.  Dollar stores have much room for growth if you use the Wal-Mart comparison.  In its last fiscal year, Wal-Mart’s annual sales were over $408 billion.  The combined sales at these four dollar store leaders were almost $26 billion for the last fiscal year of each.

Wal-Mart’s 2000 Annual Report shows that sales were $165 billion, and that compares to $25.8 billion per the 1990 Annual Report.  In short, the dollar store leaders combined today are still only where Wal-Mart was in 1990 (unadjusted for inflation and cost of living).  Are we likely to see more than tenfold rise in dollar store sales over the next one or two decades?  Let’s hope not, but this is meant as a starting point for trend analysis and reference.

Dollar stores have an implied and mandatory price target of its products regardless of what is going on between Target and Wal-Mart.  They are also not destinations.  For much of America, Wal-Mart is a destination on top of it having consistently lower prices than the companies it considers peers.

As far as a classification for a stock, we are not alone in calling Wal-Mart a classic example of being a dead-money stock.  While there have been some exceptions to this, Wal-Mart’s stock has traded from $40 to $60 for a decade.  At $48.72 today, that is not even close to any hope for a breakout.  Wal-Mart’s most recent stock hay day was the 1990’s, where shares rose about tenfold.  That performance has not exactly been seen by the dollar store sector, but there are some interesting factoids:

  • Dollar Tree is up close to 150% in the last 5-years;
  • 99¢ Only Stores has had a hard time getting and staying above $15.00 since 2004 and it used to be a $20 and even $30 stock earlier in the decade;
  • Dollar General ran almost 50% from trough to peak since its late 2009 re-IPO;
  • Family Dollar rose almost 20-fold from trough to peak during the 1990’s, and its shares before this last leg down had shown a double from the start of 2008.

Wal-Mart was supposed to be the winner of the recession as customers leaving Target, Sears, and elsewhere had to flee to comparable items (or sometimes the same items) for lower prices.  The real recession winners were the dollar stores… Maybe you have to pick and look and can’t count on your go-to items, but a buck is hard to beat.  If there is a double-dip recession that drags millions of more Americans back down that slide of misery, the dollar stores might actually get to become a destination after all.

Dollar General Corp. (NYSE: DG) recently had its own earnings and shares have slid since it reported solid earnings as well.  Shares are down 1% at $27.72 today.  One of the biggest overhangs here is that despite coming back to as a public company it is still mostly owned KKR.  The big fear is that private equity firms sell into any strength after an IPO, and there is a whole history of that happening in post-IPOs from private equity firms to back up those fears.  Since its IPO last year, Dollar General shares have traded in a range of $21.30 to $31.41.

Dollar stores will not ever equate a Wal-Mart.  Even if these dollar stores double in the coming years, they may only pass Sears at $44 billion in its latest annual sales if the company does not get back on growth.

Dollar Tree, Inc. (NASDAQ: DLTR) is down 2.5% at $41.86, but it has held up the best of the entire group.  Its 52-week range is $27.05 to $44.14.  99¢ Only Stores (NYSE: NDN) is actually UP 0.6% at $15.03 today, although its 52-week range is $11.21 to $18.10.  It is interesting that 99¢ Only Stores is up on the day when you consider that it is viewed by many as the least attractive of the group.

JON C. OGG