Dollars & Sense

Growth in dollar store sector flagging, analysts say

Published in CSP Daily News

NEW YORK -- The rapid growth of dollar stores is slowing, according to the Wall Street Journal. In recent years, these stores have burgeoned as customers and investors embraced the novelty of stores selling everything from candy to apparel at prices as low as 99 cents. The number of dollar stores rose nearly 50% to 17,000 since 2001, said the report, citing Citigroup.

But this year has brought a slowdown as the stores face tougher competition from traditional retailers such as Target Corp. and grocery chains, which have added dollar aisles and made other [image-nocss] tweaks. At the same time, dollar-store customers have felt their wallets pinched by gasoline prices.

The result, said the Journal, is that the dollar-store industry's same-store sales fell to an average rate of 0.4% in the first half of this fiscal year, down from 1.4% for all of 2004 and 4.1% as recently as 2003, the report said, citing SunTrust Robinson Humphrey analyst Patrick McKeever.

Market-research firm Retail Forward predicts that the industry's overall sales will slip to average annual growth of 5.4% over the next five years from 6.2% in the past five.

The slowdown signals that dollar stores are entering a new phase, said the report. As its rapid momentum slows, the industry must draw more of its growth from improving the performance of its existing stores. "I wouldn't yet characterize the [industry] as maturebut probably at the peak of its growth cycle and on the cusp of maturity," Sandra Skrovan, a Retail Forward vice president, told the newspaper.

Share prices of Fred's Inc. fell to $12.04 Tuesday close from around $30 in early 2004, said the Journal. The stock of 99 Cents Only Stores fell to $10.11 a share from the high $20s. Dollar Tree Stores Inc. closed at $22.97, down from the low $30s. Family Dollar Stores Inc. closed at $20.49 a share, down from the high $30s. And Dollar General Corp.considered the industry's largest and strongest companyhas seen its stock price, which closed at $18.77, mostly flat since early 2004.

Some dollar-store operators revised their earnings-per-share forecasts late last month for their current fiscal year. Dollar Tree lowered its forecast to $1.57 to $1.66 from $1.77 to $1.87. Fred's lowered its forecast to 74 to 79 cents from 84 to 89 cents due to high gasoline prices and cuts in its home state's Medicaid program.

"We expect our core customer's discretionary spending to continue to be pressured by high gasoline prices and unemployment," David Perdue, chairman and CEO of Dollar General, told investors in an August 25 conference call.

Some investors think that the selloff of dollar stores is overdone, the report said. They predict that the strongest companies will rebound once energy prices begin easing. "Some competitors are better positioned than others," Adam Newar, managing director of hedge fund Eden Capital Management, told the paper. He and other hedge-fund managers point to Dollar General's strong management, 7,600 stores and diverse merchandise mix. More than half of Dollar General's sales are in food and consumables such as detergents, paper products and health and beauty aides. Profit margins are tighter on these itemsespecially foodbut customers do not stop buying them when times get tough.

Many investors are less optimistic about the dollar-store chains that are locked into the lowest price points, the report said. They say the companies that exclusively offer goods for $1 or lesssuch as Dollar Tree and 99 Cents Onlywill be challenged because they lack the flexibility in pricing to adapt to inflation and economic cycles. The $1 limit also precludes them from expanding significantly into the refrigerated-food offerings that are bolstering competitors Dollar General and Family Dollar.

Eric Schiffer, CEO of 99 Cents Only, said single-price companies will prosper with diverse merchandise mix and unique bargains. Among his company's 99-cent offerings are an assortment of food, including gourmet items, and name-brand merchandise. The company sells three name-brand candy bars in a bundle for 99 cents, while its peers often package only two together for $1, he told the paper.

But several dollar-store chains still plan to continue their expansion this year. Dollar General intends to open 730 stores this year, up from 620 last year. Family Dollar opened 500 stores in its fiscal year ended August 31, up from 439 in its previous year. In contrast, Dollar Tree opted had planned to expand its total floor space by 20% each year, Dollar Tree opted for 14% to 16% growth this year. "We thought it was just time to take a big breath," CEO Bob Sasser told the Journal.

The industry's slowdown will force Dollar Tree's peers to follow its lead in the next two or three years, analysts said. "It doesn't make much sense for these companies to be growing as aggressively given the environment overall," said McKeever.