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Are Dollar Stores Poised to Challenge Wal-Mart?

August 18, 2014 | About:
David Goodloe

David Goodloe

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I was reading an article online this weekend that made me stop and think. The article asserted that dollar stores are hurting Wal-Mart (WMT)’s bottom line. I began to wonder if perhaps dollar stores were in a position to do more than simply hurt Wal-Mart.

While its presence was primarily regional until the late 1980s, Wal-Mart has grown in the last 25 years to be the largest public corporation, private employer and retailer in the world. For years its position has seemed unassailable in the discount store sector.

But Wal-Mart has had its share of troubles recently, of which competitors such as Dollar General (DG), Family Dollar (FDO) and Dollar Tree (DLTR) might be in a position to take advantage. Wal-Mart has received unfavorable publicity on subjects ranging from the cost of employee healthcare to its commitment to “Made in America” to shortcomings in its customer service.

Second-quarter sales were flat for Wal-Mart stores that had been open for more than a year. This comes after five consecutive quarters of negative same-store sales. The bad press clearly has hurt, but that may not be keeping customers away as much as the sluggish recovery, which has limited the spending options for low- and middle-income consumers who make up Wal-Mart’s base customer demographic. The company has a huge gap between revenue and net income.

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It is often said that numbers don’t lie, and there is truth in that, but, depending upon how they are applied and interpreted, numbers’ messages can be simple or complex. It’s a matter of perspective. For investors, applying those numbers to formulas may be simple to them, but it is complex for others. Meanwhile, being able to save a dime on a store purchase probably won’t mean much to investors, but it can mean a great deal to people who are trying to survive in a rough economy.

Although consumer spending is the driving force behind growth, it can be easy to forget that, while investors measure gains and losses in whole numbers, consumers in those low-to-middle-income demographics tend to measure gains and losses in numbers that are preceded by decimals. Individually, what they do might not mean much; collectively, though, it can. If those consumers aren’t spending as much at Wal-Mart as they once did, where are they spending their money?

The easy answer may be that they have been forced to be more frugal because of higher prices and stagnant incomes, and that probably has meant cutting out nonessential purchases. Whichever measures they may take to economize, though, those consumers still must purchase certain products on a regular basis, and most of those products can be found at Wal-Mart’s Supercenters, which frequently house Wal-Mart’s Neighborhood Market grocery stores.

Neighborhood Markets have been on a growth trajectory, but they may be part of the problem for some of Wal-Mart’s core customers. Those customers might still be going there when they have several items on their shopping lists, but if they only need one or two things, convenience could be the deciding factor. They may be opting for smaller dollar store-type outlets to save time if not money.

Customers who frequent discount stores are primarily motivated to save time and/or money. Understanding their motivations can be helpful for investors who seek better understanding of revenue trends. Out of curiosity, I took a drive yesterday and observed that local discount stores appear to have been responsive to their customers’ needs by downsizing their locations into apparently quick visit-oriented stores.

Dollar General, Family Dollar and Dollar Tree, too, have experienced gaps between revenue and net income, but they are not as pronounced as Wal-Mart’s.

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About the author:

David Goodloe
I'm a journalist by training. I grew up in Arkansas and earned my B.A. at the University of Arkansas. I earned my master's degree at the University of North Texas. My background includes stints at newspapers in Arkansas and Texas and teaching news writing and news editing to students at the University of Oklahoma and Richland College here in Dallas. I'm the editorial manager at GuruFocus.

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