Thursday, July 11, 2013

Dollar Stores Not Giving Any Credit To Couponers Shopping at Their Stores.

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.

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.

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.


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