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Shares of Family Dollar rose 7% Wednesday after the
retailer said it is gaining market share, but the company also lowered its
profit outlook.
Bad news for consumers cuts both ways for dollar
stores.
Family Dollar Stores Inc. FDO +2.15%said it
is gaining market share as cash-strapped customers spend a larger portion of
their disposable income in its discount stores, buying essential items such as
food, cleaning supplies and toiletries.
Shares of Family Dollar jumped 7% Wednesday, while
shares of rival Dollar General Corp. DG +1.59%rose
sharply as well.
The retailer's comments appeared to ease concerns among
some investors that dollar stores—which flourished in the wake of the
recession—could suffer if their customers "trade up" to more upscale stores as
income levels rise.
However, Family Dollar also lowered its profit outlook
for the third time in a year, citing continued pressure on the wallets of the
low-income consumers that frequent its stores.
"The bad economy is a double-edged sword for them," said
Anthony Chukumba, an analyst at BB&T Capital Markets. He said dollar stores
have benefited from people trading down to lower-priced goods, but their core
customers are more stretched and buying fewer items that carry higher profit
margins for the retailers.
Family Dollar said sales in the quarter ended June 1
rose 9% to $2.6 billion, though profit fell 3% to $120.9 million.
"This year is proving to be more challenging than we had
originally planned," Family Dollar Chief Executive Howard Levine told analysts on a conference call. "It's
tough out there right now for our customers, and their spending remains
constrained."
While consumers spent more on essentials, sales of
discretionary items like clothing and bedding remained weak and were affected by
unseasonably cold weather at the start of spring, Mr. Levine said. The Matthews,
N.C., company expects sales at stores open at least 12 months to rise just 2% in
its current quarter.
The company's shares nevertheless closed up $4.55 at
$68.50. Rival Dollar General's shares rose by $2.98 to $54.78.
Dollar stores became market darlings during the
recession and flourished by selling smaller packages of staple products that
catered to customers living from paycheck to paycheck. They have also benefited
from middle-income shoppers looking for bargains and people making "fill-in"
shopping trips outside of their regular grocery runs.
Investors have worried those factors could fade as
pockets of the economy show improvement. So far, that doesn't seem to be
happening. While a rebound in housing prices and a rising stock market are
lifting U.S. consumers' net wealth and confidence levels, those trends largely
haven't benefited low-income consumers, said Lynn Franco, an economist with The
Conference Board. Now, with gas prices on the rise again, these consumers may be
further pressured, Ms. Franco added.
Family Dollar and Dollar General have been altering
their merchandise mix to compete better with more-polished discounters and hang
on to customers once they start trading back up.
Dollar General attempted to expand its sales by
deepening its selection of brand-name products, but the product-expansion
strategy backfired. Too many shoppers bypassed the chain's private-brand
offerings, which carry higher profit margins, for bigger-name products like
allergy medication Claritin, which the retailer had begun offering in a variety
of sizes instead of just one.
Dollar General is now reversing course and going back to
its tried and true formula of offering a narrower, highly curated assortment of
cheap stuff.
The inclusion of more name brands and pricier products
may also have led to an increase in shoplifting. To combat that problem, Dollar
General, based in Goodlettsville, Tenn., now is adding an array of theft
deterrents, such as placing more expensive goods behind plastic doors that buzz
when opened for a long time.
Family Dollar, which has also added more merchandise and
name-brand products, has also seen a rise in theft and is adding additional
cameras in its stores, among other security measures.
"Dollar stores were all blue skies and now they are
partly cloudy to cloudy," said Charles Grom, retail analyst at Sterne Agee.
