Dancing Dollars

sayar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I have been a home maker all my life and had found it a bit challenging to meet the requirements of my home. Discount stores have always helped me manage my needs in a better way, thus as a customer I have a soft spot for them. Let’s take a look at them from an investor’s point of view.

Dwindling Numbers

Family Dollar (NYSE: FDO) came out with its figures for the quarter that were, to say the least, not impressive. Net income of $80.3 million and an EPS of $0.69 as compared to $80.4 million and $0.68 during same period last year don’t excite me, and neither does it excite investors. A 12.7% rise in net sales from $2.15 billion to $2.41 billion year over year failed to boost profits. These expectations misses have set the company on its back foot, curtailing its future expectations and earnings target. The shares fell 13%, its largest fall in more than a decade. In short the holiday season failed to cheer the company.

Let’s Assess

The company’s desperation is seen in its product offerings, which it recently expanded to include soft drinks, tobacco products, magazines and other daily consumables alike. The move to increase volumes has been partly successful, as these products bring low profitability with them. Though footfalls have increased, profits haven’t followed suit. The company has also sliced prices to stay in the race, further drowning its numbers. However, with the company offering great deals, expanding to compete with giants like Wal-Mart (NYSE: WMT) and Dollar General (NYSE: DG), and being successful in generating greater footfalls (whose results may be more obvious in the long run), writing it off wouldn’t be a smart move either.

Dollar stores cater mainly around low and mid-income groups. The suffering economy, added with the recently increased payroll tax burden, further pressurizes a population that’s already surviving from paycheck to paycheck. Another uncalled factor, keeping spending and consequently profits at bay, is that consumers are spending only on necessities and are thus avoiding splurging.

The discount retail sector presents a more or less saturated market with the presence of big players like Dollar General and Dollar Tree (NASDAQ: DLTR). Add to these Wal-Mart, Target, and Costco, and we know it’s an ugly fight.

Fight for a Dollar

Dollar General came out with its quarterly figures last month, with profits rising from $171.2 million ($0.50 per share) to $207.7 million ($0.62 per share) year over year, outperforming estimates. Interestingly, Dollar General has followed suit and included tobacco products and gift items in its catalogue. It has plans of expanding more than 600 stores in the coming year and is also buying back shares simultaneously. Though it presents a weaker debt against cash ratio compared to Family Dollar, its moves are bearing sweeter fruits. It’s the undisputed leader in the dollar retail segment.

Wal-Mart, with its immense resources, is giving all other retailers a run for their money. Huge resources convert to bulk purchases, which convert to the best discounts. Needless to say it’s in the position to offer the best products at rock bottom prices. It has a great international presence and is aggressively eying international expansions.

Dollar Tree is eyeing expansion too, particularly in the Canadian market. It’s also working on improving its supply distribution chain by expanding its distribution centres, which I guess should improve the company’s logistics. Being the smallest of the dollar chains, its expansion may not bring an immediate mammoth difference to the industry but shall surely help in its future growth. However, it remains the weakest performer in the segment.

Foolish Conclusion

In a struggling economy, I would normally bet my money on stocks offering necessities for cheap, making dollar stores an obvious choice. However, the current market scenario coupled with increased payroll taxation and a “not so exciting” holiday season where consumers are being more calculative than ever has put me into a fix. Dollar Tree appears to be a sore loser; it may turn out to be the dark horse of the race, galloping ahead in the long run. Wal-Mart is a safe bet and Dollar General seems to be on a comfortable upward trend, and therefore a stock to hold. Family Dollar should have a promising future, but I would not suggest it for short term investors.


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