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The Dollar Stores That Deserve Your Bucks


Deep discounters are thriving in this recession.

Friday's successful launch of Dollar General's (DG) IPO suggests the recession is a good time for deep discounters, or stores that offer rock-bottom prices to cash-strapped shoppers.

Dollar General operates about 8,700 stores in 35 states, most in small towns and about 30% of the total in low income neighborhoods. Dollar General plans to open about 600 new stores next year and remodel or relocate another 500. The company's same-store sales rose about 8.5% for the fiscal quarter ending in July.

In July 2007, Dollar General was taken private by KKR and Goldman Sachs (GS). Dollar General priced its initial shares at $21 each. In mid-day trading Monday, the stock rose 1% to $22.97.

There are few barriers to entry in the sector and deep discounters face increased competition from Walmart (WMT), the world's largest retailer. Walmart offers home electronics, furniture, toys, and pharmacy services in addition to low-cost products similar to Dollar General, Family Dollar Stores (FDO), 99 Cents Only Stores (NDN) and Dollar Tree (DLTR).

The great unknown, of course, is just how many new customers at deep discounters will return to more upscale stores once the economy rebounds. In the meantime, there's little product differentiation among the deep discounters, and competition is fierce. Investors looking for a seasoned company in the sector might want to take a look at Dollar Tree and Family Dollar.

Dollar Tree's same store sales grew by 6.5% in the third quarter, continuing a solid performance in the last five years that reflects new store openings and acquisitions.

"Despite being a lower-margin category, consumables have helped boost store productivity by increasing the frequency of customer visits," Zoe Tan, an analyst at Morningstar, says in a research report. "In addition, we think Dollar Tree's decision to increase the number of stores accepting Electronic Benefits Transfer cards and food stamps allows it to reach a broader range of consumers. In our view, these measures will continue to drive incremental store traffic and expand the average customer transaction size for this deep-discount retailer."
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