There's little doubt the dollar-store sector is still poised for burgeoning growth. However, most of the companies' stocks have dropped in the last year, in part because of fears that years of strong sales and earnings have made share prices too lofty.
The dollar stores "grew in a very big and accelerated way, and there's little wonder some
of the stocks have fallen out of favor," said Kurt Barnard, president of Montclair, N.J.-based Retail Forecasting. "Growth brings with it the fear that
stock prices may top out."
In addition, investors may have shied away from the sector because of the larger economy. "The stocks appear 'collared' by the healthy economy and sales trends on one hand, and the fear that rising costs and interest rates will truncate the economy on the other," said Mark Mandel, an analyst at Fulcrum Global Partners.
Dollar stores are encountering growing pains to varying degrees, but considering the amount of growth expected in coming years by analysts and the companies themselves, these lower prices could present a buying opportunity.
And analysts don't expect dollar stores' growth to top out anytime soon. "The dollar stores are very much favorites of the shoppers. Consumers love them," Barnard said. "So long as they are viewed favorably by shoppers, there's nothing to worry about."
In 2003, 66% of U.S. households shopped at deep discount retailers, up from 55% in 2000, said Morningstar analyst Anthony Chukumba.
According to Thomson First Call, five of the dollar stores --
Family Dollar Stores
99 Cents Only
-- are expected to post an average earnings growth rate of 17.4% over the next five years. That's higher than the expected 14% long-term growth rate for the entire retail sector as well as the expected 11% growth rate for the
Family Dollar Stores, Dollar Tree and Dollar General are among the stars in the dollar-store space. Yet Family Dollar is down about 18% in the past year, Dollar Tree shares are down 13%, and Dollar General is up a modest 7.7%.
When Family Dollar reports quarterly results on Thursday, analysts expect a profit of 43 cents a share, which would be an increase from 40 cents a share earned in the prior-year period. The company had announced previously that sales in its latest quarter rose 11.3% over the prior year, to $1.3 billion.
In May alone, the Matthews, N.C.-based company opened 36 stores. It currently has around 5,300 total stores, 475 of which were opened in 2003. The company expects to open 565 new stores in 2004.
As for Dollar General, the nearly 7,000-store chain recently said sales in its latest quarter rose to $2.3 billion from $2.1 billion a year earlier.
The Goodlettsville, Tenn.-based company also has grown its store base quickly, most recently opening 48 new stores in May and 292 new stores year to date. In March, the company said it expected to open 675 new stores in all of 2004 and to open a new distribution center in 2005.
But this high rate of growth isn't exactly shared by two other dollar stores lately. Fred's has opened 27 stores year to date, bringing its total to about 540 stores. It expects to open 85 to 100 new stores in 2004.
Fred's posted a 10% rise in its latest quarter's sales to $341.5 million, and it said in June that year-to-date sales rose 11% to $447.8 million.
In April, however, the company lowered its full-year 2004 earnings guidance because of lower-than-expected sales trends in the latest quarter. At around $22.50, shares of the Memphis, Tenn.-based company are down 6% from last year.
Meanwhile, 99 Cents Only has become the
dollar group's dud, recently lowering its second-quarter same-stores sales guidance to a decline of 3% to 4% among a spate of issues; the stock is down 57% in the past year.
The City of Commerce, Calif.-based company has about 200 total stores. It said in March that it expects to open about 50 new stores in all of 2004, though that number likely will be revised down.
The problems at 99 Cents Only could be hurting the whole sector's stock prices, said Morningstar's Chukumba, who believes that even though investors might be thinking similar issues could affect other dollar stores, it's unlikely. "That comparison is completely irrelevant," he said. "Their problems are very company-specific."
For the sector at large, Barnard believes that Wall Street should start to worry about the dollar stores only when their sales start to drop or when the group gets closer to reaching a saturation point in its total store count.
But Barnard thinks market saturation is probably limited for now, mostly because the companies in the dollar-store sector are different types of businesses.
For example, Dollar General and Family Dollar have little in common with 99 Cents Only, he said. Both Dollar General and Family Dollar are discounters that also sell supermarket items, most of which cost more than a dollar, while 99 Cents Only sticks to selling items that are, well, 99 cents.
Mandel also thinks saturation won't be a serious a concern for a few years. It could become one when newly opened stores don't perform well, but for now, he said, that is not happening.
He noted, however, that "rapid expansion is precipitating growing pains for some and requiring larger infrastructure investments," such as the distribution center Dollar General is adding.
For now, the staying power of the dollar stores is so intense that even retail giants
have gotten in on the action. Target has a concept called 1 Spot, while Wal-Mart is testing the waters with a concept called Hey Buck.
"We foresee the arrival of dollar concepts at large discounters such as Target bringing additional legitimacy to the dollar price point concept, and therefore the dollar-store industry," says Deborah Weinswig, an analyst at Citigroup, who last week attended the third annual Dollar Store Expo in Las Vegas.
(Fulcrum Global Partners makes a market in securities of Fred's and Dollar Tree. Citigroup does and seeks to do business with Wal-Mart and Target. Morningstar and Retail Forecasting don't do investment banking).