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Dollar Tree, Inc. (DLTR), Dollar General Corp. (DG): The Smallest of the Dollar Store Companies Seems to Be the Strongest

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Over the years, and especially since the recession, dollar stores have become more popular as consumers were left with less money to spend. Even dollar stores are under pressure as of late, however, and are facing margin shrinkage and reduced sales of non-consumables as consumers shift more towards consumables purchases.

Dollar General Corp. (NYSE:DG)

After Dollar General Corp. (NYSE:DG)’s recent earning release, the company’s stock saw a steep fall after the company reduced the earnings guidance that it had recently made for the current fiscal year. Apart from the cut in guidance, the company’s current results also pointed out certain concerns as it missed the revenue forecast but met estimates on the bottom line.

The increase in payroll taxes and tax refund delays affected customers badly. The reduction of in-hand money reduced some customers and even employees to the point of stealing. This led to inventory shrinkage beyond expectation, increasing pressure on the company as it tries to limit this shrinkage. The company also blamed bad weather as the cause of the reduction in sales, and as weather improved the sales recovered, though they were still below expectations.

The company’s margins are also getting worse as its product mix shifts from non-consumables, which carry high margins, to consumables. In consumables, however, many consumers are choosing items with lower margins; increasing tobacco sales is hurting the margins as well.

Does size matter?

Dollar General Corp. (NYSE:DG) is the largest among dollar stores with 10,662 stores, and the company has plans to add 635 more stores in 2013. Dollar Tree, Inc. (NASDAQ:DLTR) is second in terms of store count with 7,800 stores, and the company’s management has plans to gradually triple that number to about 23,000 stores.

The problem with the herculean expansion plans of Dollar Tree, Inc. (NASDAQ:DLTR) is that it will increase the company’s operating costs significantly and with an increase in sales of low-margin products, it could make the expansion unviable. Other stores are also expanding consistently as well, creating competition that will cause margins to shrink further and make survival of only the most resilient stores possible.

One and the same troubles

Family Dollar Stores, Inc. (NYSE:FDO) is also facing the same troubles as Dollar General Corp. (NYSE:DG), including the increase in payroll tax, delay in getting tax refunds, bad weather, higher gas prices, and other economic problems. Family Dollar’s margins have also shrunk, and as it plans to expand its tobacco offering its margins might be affected further. Family Dollar Stores, Inc. (NYSE:FDO) has been the worst performer among its peers, reporting a decline of 3% in its stock prices while the others have gained.

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