Discounting king Walmart (WMT) is under some duress, and while you might not have noticed, dollar stores sure have.
As the U.S. economy continues to crawl ahead, many consumers still are holding back on their spending and looking around for the best bargains available. And while you’d think that ultimately would benefit Walmart stock, you’d be wrong.
In fact, WMT actually is cutting back on orders for the remainder of the year as it looks to shed its piling inventory. Meanwhile, back in August, Walmart knocked back its revenue growth target for 2013 to the 2% to 3% range, down from 5% to 6%.
No wonder, then, that Walmart stock is up just 8% year-to-date and woefully underperforming the market.
However, Walmart’s misfortune is enriching another set of retailers: dollar stores. The business — including prominent stocks Dollar Tree (DLTR), Dollar General (DG), and Family Dollar (FDO) — is thriving.
For the year, DLTR is up 41% year-to-date, and DG has moved ahead 29%. FDO, which lags the rest of the major dollar stores, still is nearly lapping Walmart with 14% gains in 2013.
The dollar stores are taking advantage of a change in consumer behavior referred to as “small basket convenience trips” in which consumers typically purchase seven or fewer items in a short period of time. More customers — particularly those in rural areas — are looking not only for low prices but this low-volume shopping experience.
And they’re finding dollar stores a better place than Walmart for this fix.
Additionally, dollar stores have for years been improving their offerings, now stocking food products — including meats, fruits and vegetables — and more brand names its consumers know.
That has translated into success in their most recently reported quarters: DG sales increased over 11%, with same-store sales growth of over 5%. DLTR saw an 8.8% growth rate along with same-store sales improvement of 3.7%. And FDO clocked in with a 9% rise in revenue and nearly 3% growth in same store sales.
But if you’re not in these dollar stores’ stocks already, don’t worry — all three can continue to grow.
Piyush Aurora at Motley Fool points out that by the end of fiscal 2013, Dollar Tree expects to open up more than 300 new stores, Dollar General 500, and Family Dollar more than 600. While none of the figures represents a huge jump from recent annual growth rates, the point is that they’re still expanding store count — something the already sprawling Walmart now has difficulty doing domestically.
Wall Street is pretty optimistic on the prospects of DG, DLTR and FDO, too, with all three trading at P/Es in the mid- to high teens. So investors at the very least seem to expect some moderate growth out of these companies.
But the biggest argument is still the broadest one. With wages continuing to stagnate, and unemployment and underemployment still a persistent problem, dollar stores’ price is right.
As far as long-term investments go, FDO, DLTR and DG are all worth a look.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities.