How many retailers can you say are not seriously threatened by an economic downturn, the Internet, Wal-Mart ( WMT) 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), Fred's ( FRED) and Dollar General ( DG) 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) 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.
According to ACNielsen Homescan research, dollar stores saw the highest percentage growth rates in household penetration among households with annual income greater than $70,000. In 2002, 45% of households with income above $70,000 shopped in dollar stores, up from 37% in 2000. Those demographic trends bode well. Daniel Barry, retail analyst at Merrill Lynch, forecasts that the four leading dollar stores -- Dollar Tree, 99 Cents Only ( NDN), Family Dollar and Dollar General -- will post average annual growth of 18% over the next five years, according to Business Week Online.
Third, while dollar stores are popping up all over the landscape -- not coincidentally replacing shuttered book stores, travel stores and video stores in many instances -- the old mantra of "location, location, location" doesn't necessarily apply as much to dollar stores; bargain-hunting consumers, the cherry-pickers
discussed in a recent study on Wharton's Web site, don't mind going to the next strip mall or shopping center over to get the best deals on detergent, tissue products and other items offered at dollar stores -- not to mention the occasional "treasures" the group stocks. "Because of the no-frills, low-priced nature of dollar stores, they don't have to look for prime real estate,' said Skrovan.