The dollar stores are having a bit of a rough time. Family Dollar (FDO, Financial) , which recently released its second-quarter results, is the latest casualty in a highly competitive retail environment, joining peers Dollar General (DG, Financial) and Dollar Tree (DLTR, Financial) . A mix of factors including cautious consumer spending, cutthroat pricing, and a subdued holiday period have led to weakness at all dollar stores.
It appears we are entering a phase in which the dollar stores will cut back on growth plans and focus on consolidation. Family Dollar was first out of the gate, announcing earlier this month that it will close 370 under-performing stores, slash its workforce, and cut prices.
A heavily crowded space
During tough economic times, the dollar stores saw solid growth as consumers sought to save every penny. This led to rapid expansion, but now the number of stores in this space is making growth difficult to come by.
It is not surprising that Family Dollar is cutting its square-footage growth projections and looking to control costs after a 35% drop in earnings in the second quarter. The company's same-store sales were down 3.8% year over year in the previous quarter, marking the worst performance among peers. It now plans to slash prices for about 1,000 basic items in order to boost traffic.
Peers are marginally better
Family Dollar was the worst-performing dollar store last year, with a stock gain of just 3%, while Dollar General and Dollar Tree shares appreciated by more than 40%. But as things stand, an investment in any of these stocks doesn't make much sense.
Dollar General, the biggest chain of the lot, reported just 1.3% in same-store sales growth in the fourth quarter. Analysts had expected more robust growth of 4.5%. Dollar General's earnings forecast for the current fiscal year is another concern. The retailer expects to earn $3.50 per share, well below the $3.69 consensus. Since management isn't particularly confident about a bump in consumer spending going forward, it won't come as a big surprise if its same-store sales start declining.
Dollar Tree is headed in the same direction. Its revenue and earnings expectations for the current year are quite weak, and since it is the smallest dollar store of the lot, there's a risk of being crowded out by its competitors. Wal-Mart (WMT, Financial) and Target (TGT, Financial) are also focusing on smaller-format stores to increase sales, intensifying the competition in an already overcrowded area.
Dollar Tree intends to open 375 new stores this year, but weakening comps and less-productive stores might derail the company's plans.
Takeaway
Family Dollar's store closures and job cuts could be just the beginning. if same-store sales keep falling, its peers might also have to resort to such measures. After a really good performance in 2013, the dollar stores are now facing a tough time in generating credible value and hence, investors should stay away.
