Dollar Stores See Dollar Signs
Nov 1, 2008 12:00 PM, By Lauren Shepherd
For most retailers, a slowing economy characterized by inflation, unemployment and a lack of consumer confidence spells big trouble. But for at least one sector in the retail world, those aren't such bad signs. Although they haven't been completely immune to the slowdown, dollar stores have been a bright spot, reporting rising sales throughout 2008. More importantly, major dollar store operators are planning store openings for well into 2009 even while other chains are pulling back on expansion.
Although most retailers in August and September reported disappointing same-store sales or sales at stores open at least a year, dollar stores reported gains. At Matthews, N.C.-based Family Dollar Stores Inc., for example, same-store sales jumped 3.6 percent in August and 5.6 percent in September. According to Columbus, Ohio-based research firm TNS Retail Forward, same-store sales across all retailers — including discounters like Family Dollar and Target Corp. but leaving out gas stations, cars and restaurants — rose just 2 percent during August. In September, same-store sales rose just one percent, according to ICSC.
Profits for dollar stores have also been growing more than at the traditional and luxury retailers as more consumers look for value to combat high gas prices. Chesapeake, Va.-based Dollar Tree Inc. posted a second-quarter profit gain of 15 percent, largely due to a rise in same-store sales of 6.5 percent and a boost in overall sales of nearly 13 percent during the period. “Our performance in the second quarter demonstrates the growing relevance of Dollar Tree to the consumer during tough economic times,” said CEO Bob Sasser in a statement when the company announced the results late in August.
Meanwhile, mall and other higher-end retailers have struggled. Saks Inc., for example, reported a deeper loss in its second quarter and said it was now seeing customers who typically buy designer labels cut back. Previously only customers who typically spend out of their price range — called “aspirational” shoppers — were slowing down on spending. New Albany, Ohio-based Abercrombie & Fitch Co. posted an 11 percent drop in same-store sales for August, even worse than the 7.9 percent decline most Wall Street analysts had expected, according to Thomson Reuters.
Challenges remain
But even though dollar stores are in many ways performing far better than their higher-priced peers, there are pockets of weakness. Clothing sales, for example, have been slow at stores like Family Dollar. Buckingham Research analyst John Zolidis says that may indicate that lower-income consumers are still being pressured by the economy. This is despite an infusion of cash in consumers' bank accounts earlier this year from the government, which issued economic stimulus checks to eligible taxpayers earning less than $75,000 or $150,000. That burst of money, however has faded. “We do not think customers are likely to start buying apparel in larger quantities at Family Dollar stores anytime soon,” he says.
And slower sales on some merchandise isn't the only headwind blowing in the face of dollar stores. Higher costs, which have affected virtually every retailer, have also been putting a dent in the profit line at dollar stores. Food costs have jumped to record levels in the past year, making it harder for dollar stores that sell food to make a profit.
Energy and labor costs also have climbed far higher due to rising oil and natural gas prices and increases in the federal minimum wage rate. There were signs of relief on all these fronts in September. The global commodities bubble seems to have been pricked, sending costs of staples down after months of unrelenting increases.
Regardless, the recent pullback has not undone most of the rises over the past year. Deutsche Bank analyst Mike Baker estimates that Commerce, Calif.-based 99 Cents Only Stores saw the minimum wage in California jump 7 percent in 2008 on top of an additional 11 percent increase in 2007.
