Have Dollar Stores Grown Too Fast?

In the pits of the Great Recession, dollar stores seemed like a smart investment, what with the likelihood of a newly-impoverished middle class looking to cut their shopping costs; Family Dollar (FDO) was up 36% in 2008, while Dollar Tree (DLTR) rose 61%.

But the good (for them) times may be over. Since about the middle of last year, Family Dollar, Dollar Tree�and Dollar General (DG) shares have seen a pullback that may be the start of a secular move:

These once-highflying stocks have all suffered double-digit drops in the last six months, even as the overall stock market climbed. Shares of Dollar General and Family Dollar fell about 11% and 18%, pushing their market capitalizations to $15 billion and $6.6 billion, respectively. Shares of Dollar Tree have tumbled 17%, pushing its market value to $8.9 billion, after it announced last fall that its same-store sales were coming in on the low side.

Cash-strapped consumers usually translate to good business for dollar stores, whose sales and earnings soared during the recession and continued to remain healthy as the economy slowly recovered.

But these shoppers can pressure retailers’ earnings if they are so strapped they forgo purchases of higher-margin discretionary items like toys or clothing, and stick to just food, cleaning supplies and other basics.

That’s from Ann Zimmerman’s WSJ story�about the headwinds facing the discount retailers.

I’ve written about the hardships facing these stores, but that was in the context of Family Dollar (and a resurgent Walmart (WMT)) grabbing share from Dollar Tree and Dollar General. Zimmerman goes further, questioning the entire model of these stores. Consumers don’t seem to be buying higher-end goods from them, either through choice of because of continuing hardships, and the rapid expansion in stores may only be cannibalizing their existing business. Though Zimmerman cites some analysts who argue that market saturation is still a half-decade away, it’s hard not to find sense in this line of reasoning:

“There was enough business for two chains to grow strongly with rising margins, but since Family Dollar started pushing hard, it may be harder to do,” said Aram Rubinson, retail analyst at Nomura Securities.