Why Dollar Stores Will Always Be a Hit

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

As we come out of the recession, stocks like Michael Kors are on the rise, experiencing rapid growth as the economy improves. Analysts say high-income residents have recovered from the recent recession more quickly than middle- and working-class consumers, due in part to wealthier citizens benefiting from the rebounds of both the stock market and the housing market.

By contrast, some retailers that traditionally appeal to shoppers on a budget have experienced sluggish gains. While these consumers may be far from ready to begin spending lavishly, even at a dollar-store budget retailers benefit from steady earnings through economic ups and downs.

The profit problem

Dollar General (NYSE: DG) recently announced a quarterly earnings increase of 3%, but the company also lowered the high end of its forecast, driving confidence down. Low profit margins were to blame for the lowered expectations, the company explained, and with the current economy, Dollar General insists that its consumers would not support a price hike to offset the loss.

In its most recent quarter, Dollar General earned $220 million on revenue of $4.2 billion. Despite sluggish income growth, the company emphasizes that more people shopped at Dollar General locations during the first quarter of 2013 than in the same quarter last year.

But one major benefit to Dollar General's stock is its tenacity. The stock was a consistent performer during the recession, increasing its profits by 200% between 2008 and 2009. The company continued to open stores during this time, populating both big cities and small, rural towns with new locations.

Dollar Tree still prevails

Dollar General competitor Dollar Tree Stores (NASDAQ: DLTR) is considered the largest chain of "under $1.00" stores, specializing in selling only items that are less than $1.00. Dollar Tree also operates Deal$, which sells discount items of all price ranges, and a chain of stores called Dollar Bills.

The company also excelled during the recession, stating that its stores allowed people to continue to live life to the fullest even as family budgets were crunched. The company took the opportunity to grow, bolstered by successes like 2009's profit increases of more than 50%.

Even with the recession reaching its conclusion, Dollar Tree is still doing well. For its most recent quarter, the company revealed an 8.3% increase in net sales, totaling $1.9 billion--a record for the company. Comparable-store sales were up, as well, with a 2.1% increase that added to the 5.6% increase in the previous quarter.

The company recently upgraded its forecast for the remainder of the year, lifting guidance from an expected $7.8 billion in sales to between $7.8 billion and nearly $8.0 billion. It added that it is well-positioned to take on the upcoming summer season.

Many analysts are predicting that dollar store sales in general will continue to stay strong, theorizing that most Americans will decline to return to extravagant spending regardless of the economy. The retirement of the baby-boomer generation could factor into this, as well, with many seniors leaving the workforce to rely on social security during their golden years.

Superstores

The success of dollar stores begs the question, how has the Wal-Mart Stores (NYSE: WMT) world takeover impacted these retailers? There have been plenty of stories about mom and pops being put out of business by the bargain giant, but Wal-Mart advertises "everyday low prices" on all of the items consumers need...all in one place.

The company reported a 1.1% increase in income in its most recent quarter, totaling $3.8 billion. Revenue hit $114.2 billion for the quarter, falling short of expectations of $116.3 billion.

To provide added convenience, Wal-Mart has begun focusing its efforts on opening neighborhood markets across the U.S. These markets are sized like the same small-town grocery stores that have gone out of business as consumers made the switch to shopping at superstores. The company plans to open 500 stores by the end of 2016, entering many markets where dollar stores and small grocery stores are currently the only options.

A promising future

While dollar stores will likely always be popular with budget-conscious buyers, with Wal-Mart opening more of its neighborhood markets, the smaller discount retailers may find it harder to attract shoppers. Analysts have high hopes for the company, expecting Wal-Mart to grow an average of 9.3% each year for the next five years.

Expectations are higher for Dollar General, however, with analysts expecting  average growth of 15.4% each year over the next five years.

Dollar Tree, meanwhile, has an average rating of "outperform" on Wall Street, showing that it's popular not only with consumers but investors, as well. Still, there's no denying the staying power of Wal-Mart, which tends to be a go-to store for consumers of all economic backgrounds regardless of the economy, making it the choice stock of the group.


Stephanie Faris has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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