Rich Future for Dollar Stores

How many retailers can you say are not seriously threatened by an economic downturn, the Internet, Wal-Mart(WMT Quote) or less-than-stellar store locations?

All this is largely true of the so-called dollar-store retailers, those mushrooming retailers such as Dollar Tree(DLTR Quote), Fred's(FRED Quote) and Dollar General(DG Quote) that comprise the second-fastest growing retailing sector behind supercenters, with sales growth of about 5.5% a year. And the growth story looks far from over.

"We anticipate that this channel will be a strong growth channel compared to others," said Sandy Skrovan, vice president of retail-research firm Retail Forward. Skrovan believes the group is well-positioned to keep growing into untapped markets: Retail Forward estimates the U.S. market can support another 15,000 dollar stores. "The big players continue to roll out stores -- Family Dollar(FDO Quote) and Dollar General are rolling out a store a day."

While the stocks have had an impressive run over the past few years, a recent pullback among the major participants in late 2003 may present a good opportunity to pick up these stocks on the cheap.

"The gains these stocks have seen are really just the beginning," said James Altucher, a partner at hedge fund Subway Capital and contributor to Street Insight, TheStreet.com's sibling publication.

So let's take a closer look at the group, exploring why the demographics and competitive landscape are playing to its favor.

Demographics

The perception is that dollar stores are primarily the province of lower-income families in urban or rural areas, but research shows the group has been making great inroads into all swaths of U.S. consumers. According to Retail Forward, the percentage of shoppers making a purchase at a dollar store over a 12-month period totaled 54% in 2002 -- up from 43% in 1997. Meanwhile, the percentage of frequent dollar-store shoppers -- customers who patronized the stores at least twice a month -- jumped to 28% from 17% in that time period.