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Wal-Mart Is Going After Dollar Stores

Wal-Mart (NYSE: WMT  ) , the world's largest retailer, has over the years become the prime example of corporate power. Due to its sheer size the company holds considerable sway in terms of pricing, and due to its number of employees it has a large impact on the US job market. However, this growth can't continue indefinitely. Fiscal 2014 wasn't a particularly good year for Wal-Mart, and the company is now looking for ways to expand. Its latest plan is to enter the dollar-store space, which could prove to be bad news for companies like Family Dollar (NYSE: FDO  ) , Dollar General (NYSE: DG  ) , and Dollar Tree (NASDAQ: DLTR  ) .

Uninspiring results
The company's fourth-quarter and full-year fiscal 2014 report was a bit of a letdown for investors. Underlying earnings per share for the quarter declined from $1.67 a year ago to $1.60 for a 4.3% drop, and comps were down 0.4%. For the full year, the company grew underlying EPS by 2% to $5.11. Consolidated net sales for the year increased by 1.6%, while consolidated operating income dropped by around 3%. Not particularly impressive results at all.

This sluggish growth highlights the struggle faced by low-income US consumers, who have been hit by several government measures throughout the fiscal year. Cuts in the US food stamp program have hit this demographic hard, and as one in five Wal-Mart customers is estimated to rely on this supplemental program, Wal-Mart's top line has suffered as well. Another factor that affected the lower income consumer was a hike in payroll taxes.

Taking on the small guys
As thinking big has so far failed to increase store traffic, the retail titan has undertaken a number of measures to boost sales. One avenue in which the company has been investing is the e-commerce channel, and so far this seems to have been relatively successful. However, the real push will presumably be a focus on smaller stores, a segment in which Wal-Mart's comp sales have grown quite rapidly.

A typical Wal-Mart superstore averages around 182,000 square feet. However, many shoppers don't want to traipse over such a distance just to pick up a carton of milk or a loaf of bread. As such, Wal-Mart Neighborhood Markets, which typically average around 38,000 square feet, have seen increased traffic. In the latest report, the segment that includes these markets saw its comps up a very healthy 5%. It is estimated that this growth will accelerate as Wal-Mart now intends to open 270-300 small-format stores after it previously projected 120-150 new locations.

This smaller-format retail space is one currently inhabited by dollar stores such as Dollar General, Dollar Tree, and Family Dollar. Some scary numbers for this industry from a Bloomberg research report: Wal-Mart is able to offer lower prices on household goods 100% of the time, and around 85% of the time it can offer them on auto supplies, groceries, pharmacy items, and beauty care products. If Wal-Mart does choose to enter the segment, dollar stores will be hard pressed to find a competitive edge that does not rely on pricing power. One option seen as beneficial by analysts may be a process of consolidation in the industry.

The bottom line
Wal-Mart's growth seems to be slowing, as its weak fourth-quarter and full-year report demonstrated. Faced with declining store traffic and decreasing income from budget-conscious shoppers, the company is now looking toward other means of sustaining growth. E-commerce is one option, but Wal-Mart's management is now especially turning toward smaller stores which are producing faster growth. This is a serious threat to traditional dollar store chains which currently dominate the space, as Wal-Mart is generally able to offer lower prices on most items. As such, the industry will be forced to either consolidate or innovate in order to remain competitive.

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Read/Post Comments (8) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 12, 2014, at 8:45 AM, firefly61 wrote:

    What if none of us shop there?

  • Report this Comment On March 12, 2014, at 10:56 AM, JunieBee wrote:

    Walmart has raised their prices and are certainly not the cheapest anymore. I see less people shopping there anymore. It irritates me to have to price-match almost every item when I shop for groceries. Soon, I too will be gone to another store.

  • Report this Comment On March 12, 2014, at 12:00 PM, ernaldo wrote:

    Whalemart IS a dollar store......

  • Report this Comment On March 12, 2014, at 1:22 PM, Burstedbladder wrote:

    Good, because in my small town, our dollar store has nothing in there for a dollar other than the effen junk food.

    I'd love to see Walmart take over our dollar General store in my small town. They would then hire more people and have a better selection of products than all this garbage the Dollar Store is selling.

    Also, Walmart takes back returns, the dollar Store in my town tells the people if you buy it, open it and it doesn't work, we don't issue you a refund because we don't know of you broke it or if it was broken when you bought it.

  • Report this Comment On March 12, 2014, at 2:54 PM, peter1225 wrote:

    Wal-Mart is only going after the Dollar stores because they are getting killed by them. As of now

    Wal-Mart carry Dollar store type products to keep up but as soon as the Dollar stores go out Wal-Mart will remove those products and you will be stuck buying over priced Dollar store items at more then they are worth.. boo to Wal-Mart its a good thing Sam Wall is dead or he would be having a fit now

  • Report this Comment On March 13, 2014, at 9:26 AM, Thelma137 wrote:

    Wal-Mart would still have long lines, poor customer service! The Dollar Store is way more friendly and they truly appreciate your business!!

  • Report this Comment On March 13, 2014, at 11:13 AM, comosichiam wrote:

    Why go after other businesses because you think they pose a threat to your empire they are miniscule when compared to your organization leave them alone they are good for the small communities that don't fit your business model.

  • Report this Comment On March 14, 2014, at 3:58 AM, gizzy wrote:

    If we all don't shop at ANY Wally World store maybe they will get the hint that they SUCK ROCKS.

    I personally love the dollar stores. For a dollar you can get the same products that WM sells for $3.88.

    WM needs to be taken down off their high horse and trampled!

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Daniel James

I'm primarily a value and fixed-income investor with a background in cultural anthropology. As a writer for the Fool, I focus mainly on the consumer goods sector, also dabbling in technology occaisionally. When not pouring over the world's stock markets, I like to read, travel and make music.

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