Dollar Stores Gaining Discount Retail Market Share, Expert Says

Dollar store stocks have lagged in the past three months as investors anticipate a reopening of the economy could push shoppers back toward higher-end stores.

Howard Jackson, President of HSA Consulting and Director of Retail Restructuring & Integration at Pritchett LP, told Bank of America this week that the outlook is still good for dollar stores, suggesting the recent dip could be a buying opportunity.

Demand Is Strong: Jackson said the market for dollar stores is still growing, most strongly in the South.

“Dollar stores appear to be taking increasing share of the growing deep discount market (based on sqft growth), which could continue if they can maintain their price advantage,” he said.

In fact, Dollar General Corp. DG has said it sees an opportunity for another 17,000 new store openings in the long term, a goal Jackson said is feasible. He said the company may also decide it makes more sense to limit unit growth in more competitive markets and focus instead on growing same-store sales growth in existing stores.

Related Link: 6 Reasons Dollar General Isn't Worth Buying Right Now

Potential Risks: For now, Jackson said growing competition for private label and close-out merchandise could pose risks to dollar store retailers. In addition, exchange rates could also serve as a headwind. For example, Dollar Tree, Inc. DLTR currently imports about 40% of its merchandise.

Jackson is also bullish on Dollar Tree Plus!, Dollar Tree’s new program that will include adding products priced above $1. He said Dollar Tree must make sure DT+ maintains a pricing advantage for it to be successful. Recent pricing surveys have shown Walmart Inc WMT has been 6% to 7% more competitive on pricing than Dollar Tree.

Benzinga’s Take: The key to success in the modern retail world is pricing and convenience. For now at least, the combination of competitive discount pricing and quick, easy in-and-out shopping has allowed dollar stores to stave off online competition from Walmart and Amazon.com, Inc. AMZN.

Photo: Dollar General.