In an economy in which everyone seems to be downsizing, it appears that Wal-Mart Stores (NYSE: WMT) shoppers are shifting gears, too — and so-called “dollar stores” such as 99 Cents Only (NYSE: NDN), Family Dollar (NYSE: FDO) and Dollar Tree (NASDAQ: DLTR) are seeing gains that put the purported King of Everyday Low Prices on the defensive.
Dollar Tree stock is not only up +38.47% year-to-date against the Dow, its consolidated net sales for the second quarter were $1.38 billion, a nearly +13% increase compared to $1.22 billion reported for this same quarter last year. Retail sales for 99-cent Only Stores increased by +4.6% to $336.6 million and same-store sales increased +2.7% so far this year. NDN stock has risen +16% since early June and in August is reported an EPS of $0.24 on sales of $346 million, beating estimates by $0.05 and matching revenue estimates. And Family Dollar Stores saw its net profit increase +19% during the third quarter, with similar year-to-date highs.
Meanwhile, Walmart is down -3.9% year-to-date, about on par with the Dow’s -3.8% figures. Its earnings in the second quarter net income, though, rose 3.4% to $3.6 billion, or 97 cents per share, from a year earlier, mostly propped up by internal cost cuts and international sales increases. Wal-Mart Store’s overall store sales dropped -1.4 percent, which are falling far behind the gains of +7% by Family Dollar, +6.7% by Dollar General, and +6.5% by Dollar Tree.
No one saw this coming better than the “dollar stores” themselves, which have slowly been ramping up service efforts and offerings. Family Dollar, for instance, now touts an increase in food (brand names such as Kraft, Smucker’s jams and even Prego sauces), paper products and health/beauty supplies. Earlier this year, Dollar Tree announced plans to add 220 new stores, Dollar General has plans for 660 new stores and Family Dollar is to build some 200 new stores, all by year’s end.
Another reason the stores are nabbing new customers and maintaining them is location and operating cost. While Walmart is mostly suburban and rural-based, Family Dollar can be tucked into strip malls with low rent and overhead – close to where low-income residents live – while the superstores require giant swaths of land to set up shop. A Wal-Mart store averages 185,000 square feet. “Dollar stores” average about 7,000 square feet. In effect, the recession’s frugal urban shoppers can not only reach the smaller stores quicker, but get in and out faster.
Dollar General CEO Richard Dreiling said earlier this summer during an earnings call that “our key point of difference with our customers is our everyday low price in a convenient location,” outright snatching the favorite moniker of WMT stock. Walmart, ever the corporate giant, responded by noting they don’t comment about the competition.
Whether the stores can hold on to consumers once the economy and jobs figures improve is another matter. Analysts, for their part, expect that trend to continue. According to Thomson Reuters I/B/E/S, on average, forecasts second-quarter earnings of 97 cents a share on sales of $105.40 billion. That’s up 88 cents and roughly $100 billion from last year.
It would stand to reason. The same consumers who began shopping at these stores out of a necessity would do well to return time and again to purchase everyday items such as cleaning supplies, food, cups, utensils, and paper towels. It’s hard for people to justify paying dollars more for paper towels when they’ve gotten used to purchasing them for half that.
Wal-Mart, meanwhile, is said to be testing smaller store formats, and ditching their “rollback pricing” slogan with “everyday low prices,” since the company now seems to be increasing costs on at least some items. A J.P. Morgan analysis from June to July showed that the price of a selection of 31 items it tracks at Wal-Mart rose 5.8%. So for now consumers and investors will be watching the company’s pricing strategy equally, and one wrong move could have the retail giant falling further behind in a game it’s currently losing.
As of this writing, Burke Speaker did not own a position in any of the stocks named here.
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