With daily reports in the financial press about the collapse of subprime lending, and the precarious position that lower-income Americans are finding themselves in, there's one group of retailers that may be destined to profit: Dollar stores. As people have to scrimp and save more to cover their ballooning mortgage payments, they may look to these discounters for household staples.
In addition, these companies are messing with big box retailers like Wal-Mart Stores, Inc. (NYSE: WMT) with competitive pricing and a smaller, more user friendly store-format.
Demographic trends are also helpful. Incomes at the lower-end are growing slowly and, as the baby boomer population ages, budget constraints may make these discounters more attractive.
These companies also tend to have simple business models, high turnover, and fairly predictable cash flows. While the private equity bull market appears to have waned, attractively valued dollar stores may still be attractive to some firms. KKR recently acquired Dollar General for $7.3 billion.
If you think dollar-stores have a bright future, you have a few investment options.
Dollar Tree Stores, Inc. (NASDAQ: DLTR): These guys operate over 3,200 stores, and nearly all are single-price point locations. They don't have many dollar stores in my area but this is the best one I've ever been in. The stores are clean, neat, and full of bargains, and they seem like they're always packed. At 20 times earnings, this is the best of breed in this category, and probably the stock to buy if you want to play dollar stores as a top-down investment.
99 Cents Only Stores (NYSE: NDN): After seeing this company's unassuming founder featured in an episode of CNBC's Business Nation, it's hard not to root for these guys. In an industry driven by efficiency and margin pressure, 99 Cents Only gave all its employees stock options when the company was taken public. But the stock has been dead money for years, and boasts anemic returns on equity. But if the problem is mismanagement, it could be an attractive buyout target at some point.
Family Dollar Stores, Inc. (NYSE: FDO): With over 6,300 stores, this has been one of the fastest-growing discounters for year. But it's more of a traditional discount store than a single-price point store, and many items are nowhere near $1, which makes it considerably less fun for the consumer, I think. Isn't it nice to go into a store and not have to look at prices? But at 16 times earnings with a nice little dividend, this might be one you want to add to your portfolio.
Closing Bell: When We All Love the PIIGS (NBG, SQNM, PG, ERTS, KO)
Serious Money: Cheapest Stocks List Shrinks from 26 to 21
Chasing Value: Hasbro Earnings Makes My Point
Reader Comments (Page 1 of 1)
8-14-2007 @ 11:32AM
stella watkins said...
No, these stores are NOT competing with Wal-Mart or grocery stores. They are popping up in place already abandoned by supermarkets and other mall stores. In doing so they actually take the place of the 'old' neighborhood A&P's and other mom'n'pop stores.
If the big mall stores view these as competition, then that is their problem for abandoning neighborhoods. What drives these situations are gas prices, and bus access.