Summary
Beneficiaries of the depth of the recession, poor responses by mass merchants and alterations in consumer perceptions, Dollar Stores in general may be peaking in value now, not showing potential for upside during an economic rebound.
Analysis
Dollar stores, as a retail niche, have capitalized on the recession-driven changes in consumer purchase behavior more than any other single retail segment. Limited frills, limited assortments, and deep perceived bargains are working tactics in today's climate. However, once the economy begins to rebound, and employment returns, it is highly likely that these stores will be the first to be abandoned when consumer needs change.
In retail, the shopping "experience" is a lower order need to keeping the family fed, replacing necessities, and just doing something fun with what little is left over. Store layout, service levels, and depth and breadth of assortment do not place highly when disposable income is so limited. Once that equation changes, however, those needs reassert themselves. And with minor exceptions, Dollar Stores, and Dollar General in specific, are NOT well positioned to participate in a retail recovery. In short, the current conditions are the most condusive to profitability and revenue growth that Dollar General could ask for.
Do not be misled. Dollar General is executing well in the current environment. However, the IPO is based on the future value of the chain, not the current value. The future value is capped by the definition and limitations of not only the segment itself, but the economics of each of the major players. Dollar General cannot and willnot transform into an upscale version of itself. The segment dynamics preclude it. Instead, it will be locked into a struggle to produce gains within a diminishing consumer segment, not a growth one.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
