Dollar Stores Are Still Popular With Middle-Class Consumers

The financial crisis and the economy's slow-paced recovery have been a huge boost for business at dollar stores. These discount retailers' share prices have soared throughout this period, and some shareholders have benefited from increasing dividends as well. The low prices these retailers offer have attracted consumers struggling with depressed home values, a restricted credit market, and a tough job sector.

As the middle-class consumer continues to be affected by some of these issues, retailers like Dollar Tree Stores (NASDAQ: DLTR  ) and Family Dollar Stores (UNKNOWN: FDO.DL  ) continue to report healthy profits.

The growth in share value for these companies has been impressive. Dollar Tree traded at slightly less than $10 per share at the start of 2008. After two stock splits in 2010 and 2012 aimed at keeping share prices low, Dollar Tree shares have risen to $59 per share and are valued at 18 times 2015 earnings.

In comparison, Family Dollar Store shares traded at around $19 per share in 2008 and currently trade at $70 per share; the stock's price-to-earnings ratio is 16 times 2015 earnings. Family Dollar's dividends have also risen steadily during this period.

Continued, albeit cautious, growth expected
Dollar Tree's latest second-quarter results for the period ended Aug. 3 showed an increase in diluted earnings per share of 9.8% to $0.56. The operating margin increased 10 basis points during the quarter to 10.9%. The company opened 81 stores during the period and expanded or relocated 32 stores. Retail sales space grew by 7% versus a year ago to 42 million square feet.

Predictions for the third quarter estimate that sales will range between $1.87 billion to $1.92 billion, assuming a single-digit increase in same-store sales. Diluted EPS is expected to be between $0.54 and $0.59 per share.

Family Dollar Stores' fourth quarter ended on Aug. 31, and the retailer delivered adjusted diluted EPS of $0.86, up 14.7%. Comparable-store sales were flat during the period. For the fiscal year, the company reported an increase of 4.4% in adjusted and diluted EPS to $3.80 and higher comparable-store sales by 3%.

The company expects growth over the near term -- 500 new stores opened in fiscal 2013 and plans are in place to open 525 stores in fiscal 2014. It has adopted a cautious stance going into the new fiscal year as it works to increase market share, improve inventory turnover, and provide greater value to its customers.

Are dollar stores a better value than Wal-Mart?
There's a sense that a part of the middle class may be trading down to dollar stores as prices for some consumable and discretionary items found in discount retailers, like Wal-Mart Stores (NYSE: WMT  ) , can seem too pricey. Kristen Bentz, executive director at private equity firm PMG Venture Group, told CNN she believes this may be the case, as middle-class consumers continue to deal with a decline in purchasing power.

Wal-Mart's latest third-quarter earnings saw consolidated net sales rise 1.6% to $114.9 billion. Total revenue reported was $115.7 billion, up 1.7% from a year ago but below the $116.8 billion Wall Street was hoping for.

Mike Duke, Wal-Mart's president and CEO, stated that while the current retail environment remains competitive, the company has aggressive plans to increase holiday sales. Economic uncertainty is a headwind for the business and Duke believes "some customers feel uncertainty about the economy, government [and] job stability."

The slow growth is expected to continue into the first month of the fourth quarter. Wal-Mart also remains committed to reducing operating expenses as a percentage of net sales by 100 basis points by fiscal year 2017.

My Foolish conclusion
As conflicting economic data continues to come out, the U.S. economy appears to be on a path moving one-step forward and two steps back. Uncertainty and weakness in the job sector should continue to negatively impact consumer spending. This can drive more consumers to shop at dollar retailers while they wait for income levels to stabilize and show signs of a stronger positive momentum going forward.

As Wal-Mart falls, who rises?
To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

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