Dollar Stores Holding New Shoppers Even as Recovery Buoys Rivals

So far, in the economy’s first stumbling steps to recovery, evidence suggests that dollar stores may well retain a fair number of the consumers who have turned to them in the recession.

A lot of shopping is habitual, certainly, and the quality of product available for a buck certainly would have surprised first time customers who turned to the stores in the dragging economy. However, recently, many major and more expensive retailers have been reporting numbers that suggest they are returning to form. Target’s (TGT) October comparable store sales approached break even as did Macy’s (M). Whole Foods (WFMI) said that, after a narrowing comp decline in the last completed quarter, the current period is returning positive comparable stores sales. Amid that, though, dollar stores keep chugging along.

In one example of vitality, 99 Cents Only (NDN) just turned in a stellar performance. Posting its second quarter sales, the company’s earnings per share came in at 14 cents, which Wedbush Morgan analyst Joan Storms pointed out is “much better” than her and a consensus expectation of eight cents, and she raised her earnings target for the year by six cents to 64 cents per share.

Critically, the company’s Texas operation, which has suffered for years and which it was on the verge of abandoning a year ago, swung to break even in the quarter. In California, it’s heartland, 99 Cents Only also endured a long period of consumer neglect before catching on. The company has said its experience it in Texas had been similar, but it does acknowledge that the recession has helped convince folks in the Lone Star State to take a second look at 99 Cents Only.

Certainly, 99 Cents Only isn’t the only dollar store surprising observers. Storms noted that Dollar Tree (DLTR) just announced third quarter sales results that included an almost seven percent comp gain, which beat her four percent estimate and a consensus of a bit under five percent.

Dollar stores haven’t simply been wallowing in success generated by the abundance of worried consumers who rushed their way in the recession. The retailers have taken positive steps to ensure that those who try them like them and will continue liking them. In a research note, she stated:

Dollar Tree has proven to be an excellent safe haven during recent challenging times and as such has provided strong returns by successfully adopting strategies to increase their mix of consumables, which has resulted in increased traffic, positive comps and earnings growth. Given recent strong performance in more discretionary categories, we believe the company is also well positioned to benefit in a recovering economy with a more discretionary mix than other dollar stores and therefore should attain a higher multiple compared to those selling more consumables.

Similarly, she noted that Family Dollar (FD0) had strengthened its product mix, in this specific case adding everyday consumable products to effectively balance the assortment. That change should help it retain customers in the recovery. After its recent analyst meeting – Walmart isn’t the only retailer allowed to hold analyst meetings, after all – she ventured:

The company has been expanding consumables, paying more attention to heavier and lighter shoppers, improving in-store signage, clustering category products as “solutions”, and applying insights from Nielsen consumer research data about its products and merchandise, all while adhering to the founding principles of value and convenience.

The fact that dollar stores continue to do well even as other retailers begin to improve is fairly impressive. Storms herself has had doubts about whether dollar stores would continue to perform well as consumers began to spend again. That the bargain-oriented retailers remain strong – and you can lump Walmart and warehouse clubs in with the dollar stores based on their recessionary performance – does suggest some consumers who turned to discount dens in the recession are sticking with their newer propensities in the recovery, even as they are returning, at least in a limited way, to shopping habits and haunts of old.